S-1/A 1 d591354ds1a.htm AMENDMENT NO.5 TO FORM S-1 Amendment No.5 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on November 8, 2013

Registration No. 333-191737

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

OXFORD IMMUNOTEC GLOBAL PLC

(Exact name of registrant as specified in its charter)

 

 

 

England and Wales   2835   Not applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

94C Innovation Drive,

Milton Park, Abingdon

OX14 4RZ

United Kingdom

Tel: +44 (0)1235 442780

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

 

 

Peter Wrighton-Smith, Ph.D.

Chief Executive Officer

Oxford Immunotec Global PLC

94C Innovation Drive

Milton Park, Abingdon

OX14 4RZ

United Kingdom

Tel: +44 (0)1235 442780

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

 

 

Copies to:

 

 

Michael D. Beauvais

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

(617) 951-7000

 

Patricia Randall

General Counsel

Oxford Immunotec Global PLC

700 Nickerson Road

Suite 200

Marlborough, MA 01752

(508) 481-4648

 

Deanna L. Kirkpatrick

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

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

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate offering
price(1)(2)

 

Amount of

registration fee(3)

Ordinary Shares, £0.006705 nominal value

  $92,460,000   $11,909

 

 

 

(1)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
(2)   Includes shares that may be sold upon exercise of the underwriters’ option to purchase additional shares. See “Underwriting.”
(3)   $11,109 was previously paid on October 15, 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 the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

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

 

SUBJECT TO COMPLETION, DATED NOVEMBER 8, 2013

PRELIMINARY PROSPECTUS

5,360,000 shares

 

LOGO

Oxford Immunotec Global PLC

Ordinary Shares

$         per share

This is the initial public offering of our ordinary shares. We are selling 5,360,000 ordinary shares. We currently expect the initial public offering price to be between $13.00 and $15.00 per ordinary share.

We have granted the underwriters an option to purchase up to 804,000 additional ordinary shares to cover overallotments.

We have applied for listing of our ordinary shares on The NASDAQ Global Market under the symbol “OXFD.”

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our ordinary shares involves a high degree of risk. See “Risk factors” beginning on page 13.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy 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 have agreed to reimburse the underwriters for certain FINRA-related expenses. See “Underwriting.”

The underwriters expect to deliver the ordinary shares to purchasers on or about                 , 2013.

 

J.P. Morgan   Piper Jaffray

Cowen and Company

  Baird

                , 2013


Table of Contents

Table of contents

 

    Page  

Prospectus summary

    1   

Risk factors

    13   

Cautionary note regarding forward-looking statements

    45   

Use of proceeds

    46   

Dividend policy

    47   

Capitalization

    48   

Dilution

    50   

Selected consolidated financial data

    52   

Management’s discussion and analysis of financial condition and results of operations

    55   

Business

    83   

Management

    116   

Executive compensation

    124   

Certain relationships and related party transactions

    139   

Principal shareholders

    142   

Description of share capital

    145   

Shares eligible for future sale

    160   

Material tax considerations

    162   

Underwriting

    172   

Legal matters

    178   

Experts

    178   

Enforcement of judgments

    179   

Where you can find more information

    179   

We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Until                     , 2013, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside of the United States: we have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ordinary shares and the distribution of this prospectus outside of the United States.

 

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Prospectus summary

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in our ordinary shares and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk factors” and our financial statements and the related notes, before deciding to buy our ordinary shares. Unless the context requires otherwise (i) prior to completion of the Scheme of Arrangement (as defined below), which was effected on October 2, 2013, references in this prospectus to the “Company,” “we,” “us” and “our” refer to Oxford Immunotec Limited and its consolidated subsidiaries and (ii) following completion of the Scheme of Arrangement, references in this prospectus to the “Company,” “we,” “us” and “our” refer to Oxford Immunotec Global PLC and its consolidated subsidiaries, including Oxford Immunotec Limited.

Overview

We are a global, commercial-stage diagnostics company committed to improving patient care by providing advanced, innovative tests in the field of immunology. Our proprietary T-SPOT® technology platform allows us to measure the responses of specific immune cells, known as T cells, to inform the diagnosis, prognosis and monitoring of patients with immunologically controlled diseases. T cells are a central component of the human body’s immune system, and are implicated in the control and progression of many medical conditions, including certain types of infectious diseases, cancers and autoimmune diseases.

The initial product we have developed using our T-SPOT technology platform is our T-SPOT.TB test, which is used to test for latent Tuberculosis (TB) infection, or LTBI. Our T-SPOT.TB test has been approved for sale in over 50 countries, including the United States, where we have received pre-market approval (PMA) from the Food and Drug Administration (FDA), in Europe, where we have obtained a CE mark, as well as Japan and China. Our T-SPOT.TB test has been included in clinical guidelines (that is, guidelines issued by governmental agencies and professional societies covering recommended or suggested uses of available diagnostics) for TB screening in 17 countries, including the United States, several European countries and Japan. In addition, we have established reimbursement for our test in the United States, as well as a Current Procedural Terminology, or CPT, code that is used only for our test. We believe that many payors rely upon CPT codes to determine the amount they pay providers. Outside the United States, we have established reimbursement in several countries where reimbursement applies, including Japan, Switzerland and Germany. Our customers benefit from the existence of reimbursement mechanisms as it provides more certainty of the amount they will be paid for performing our test, as described in the section under the heading “Business—Funding and reimbursement.” We believe the annual global market opportunity for our T-SPOT.TB test is well in excess of $1 billion, assuming we can largely displace the skin test described below in the developed world.

Tuberculosis remains a significant global public health problem. According to the World Health Organization, or the WHO, approximately two billion people globally have LTBI, and on average each carries a 10% lifetime risk of progressing to active TB disease. In 2011, approximately 9 million people contracted active TB disease, of which approximately 1.5 million people died.

 

 

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A central component of TB control strategies worldwide, particularly in developed markets, is to screen large numbers of people in high-risk groups for LTBI. These screening programs seek to identify infected people so that treatment can be administered to prevent these individuals from subsequently progressing to active TB disease and infecting others. In total, we estimate that there are 22 million LTBI tests performed each year in the United States in a variety of settings, including hospitals, public health departments, physicians’ offices and clinics. Outside the United States, we estimate the total number of tests to be 28 million each year, for a combined market size of 50 million LTBI tests annually.

The vast majority of these tests are performed using the 100-year-old Tuberculin Skin Test, or the TST. Our T-SPOT.TB test is designed to replace the TST and has several important advantages over the TST including higher sensitivity (a measure of our test’s ability to correctly identify infected subjects) and specificity (a measure of our test’s ability to identify uninfected subjects), simpler test administration, and the ability to reduce costs for healthcare institutions.

Sales of our T-SPOT.TB test are growing rapidly. As of September 30, 2013, we had cumulatively sold over two million T-SPOT.TB tests, with approximately one million tests sold over the 12 months ended September 30, 2013. Over the last three years we have grown our revenue from $4.3 million in 2009 to $20.7 million in 2012, a compound annual growth rate of 69%. We attribute the growing commercial success of our T-SPOT.TB test to the following factors:

 

 

Compelling advantages over the TST.    Our T-SPOT.TB test enables better TB control due to its clinical, logistical and health-economic advantages. The cost-effectiveness of our T-SPOT.TB test versus the TST has been demonstrated in multiple studies and has been persuasive in the adoption of our test.

 

 

Broad regulatory approval and scientific validation.    Our T-SPOT.TB test is approved for sale in over 50 countries, giving us a substantial accessible market. The performance of our T-SPOT.TB test has been validated in over 300 peer-reviewed publications in scientific journals.

 

 

Supportive guidelines.    Our T-SPOT.TB test has been recognized in clinical guidelines for TB screening in 17 countries, including the United States, several European countries and Japan.

 

 

Established payment mechanisms.    We have established reimbursement in several key countries, including the United States, Japan, Switzerland and Germany.

 

 

Large underpenetrated market.    Our T-SPOT.TB test addresses the estimated global market of 50 million tests per annum, which we believe represents a market opportunity for us of well in excess of $1 billion. Our penetration of this market is in its early stages. We estimate that over 90% of testing is still performed with the TST, giving us a significant opportunity for long-term growth through displacement of the TST.

 

 

Flexible business model.    We offer our T-SPOT.TB test in two formats to accommodate customer preference and maximize sales. Our in vitro diagnostic kit format (a test performed outside the body), which is available globally, allows customers to perform the test in their own institutions. In our service format, which we offer in the United States and the United Kingdom, we perform our T-SPOT.TB test on samples sent by customers to our laboratory facilities. Our service offering provides us with direct customer contact and, therefore, unique market insights.

 

 

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Recurring revenue.    Once a customer begins using our T-SPOT.TB test instead of the TST, our experience is that the customer rarely goes back to using the TST. This purchasing pattern allows us to continually leverage our sales force to generate new business, rather than to maintain existing customers.

We are a global business with 151 employees, including sales and marketing teams, on three continents, and laboratories in the United States and the United Kingdom. We sell to customers in over 40 countries and derived 50% of our revenue from outside the United States for the year ended December 31, 2012. Our current customer base is comprised of over 1,000 active customers, consisting of hospitals, public health departments, commercial testing laboratories, importers and distributors. Our revenue for the year ended December 31, 2011 was $12.6 million, for the year ended December 31, 2012 was $20.7 million, and for the nine months ended September 30, 2013 was $28.6 million. Our net loss for the year ended December 31, 2011 was $13.1 million, for the year ended December 31, 2012 was $14.9 million and for the nine months ended September 30, 2013 was $5.3 million.

Current TB skin test and its limitations

The primary test currently used for TB screening is the 100-year-old TST. The TST is administered by injecting an extract from cultured M. tuberculosis, called Tuberculin or Purified Protein Derivative, known as PPD, into the skin of a subject’s forearm using a needle and syringe. The injection of PPD into the skin of a subject previously infected with TB stimulates the immune response, including T cells, causing the formation of a hard lump at the site of the injection. Because it takes time for this reaction to occur, the subject must return in 48 to 72 hours after the PPD injection to have the result read. The test result is graded by feeling for the boundaries of the swelling, marking these boundaries with a pen and then measuring the diameter with a ruler.

The TST suffers from several limitations, including the following:

 

 

Antiquated technique results in substantial test variability.    The technique of administering the PPD injection and reading the TST is inherently variable. For example, variation in the size of the swelling due to administration of the injection averages approximately 15%, while variation in test reading among experienced operators is also estimated at approximately 15%.

 

 

Multiple patient visits required.    The TST requires that the patient return in 48 to 72 hours after the time of injection. This requirement presents a significant logistical challenge. Additionally, non-return rates can be as high as 30%, resulting in considerable time and money being wasted to persuade the subjects to be rescreened as well as the duplicated materials costs and time associated with retesting.

 

 

False negatives.    False-negative results to the TST are common due to a number of factors relating to the quality of the PPD used and the patient receiving the injection. Specifically, the PPD may be improperly stored, improperly diluted or contaminated. In addition, infections (including active TB disease) can suppress the TST response, leading to a false negative. False negatives are also prominent among newborns and elderly subjects. Many other conditions can also cause false-negative TST results, including HIV, certain live-virus vaccinations and common immunosuppressive drugs such as steroids and biologics.

 

 

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False positives.    False-positive results to the TST are common and are attributed to the presence in PPD of antigens that are shared with other mycobacteria. As a result, the TST can cross-react in those patients who are infected with non-tuberculous mycobacteria as well as those patients who have received the Bacille Calmette-Guerin, or BCG, vaccine for TB, which is the most widely administered vaccine in the world.

 

 

“Boosting” of results.    The TST result can also be “boosted,” which occurs when an infected subject’s reaction to an initially false-negative skin test causes increased sensitivity in a subsequent test such that the subject tests positive. The misinterpretation of a boosted reaction as a new infection with M. tuberculosis can result in unnecessary additional testing for the subject, unnecessary treatment and unnecessary testing of other people.

Our solution

Our T-SPOT.TB test is a highly sensitive and specific, single-cell based method for identifying LTBI. It is a single-tube blood test that directly measures antigen-specific T cells that indicate LTBI. We believe our T-SPOT.TB test has a number of compelling advantages that make it a superior alternative to the 100-year-old TST, including:

 

 

In head-to-head studies, our T-SPOT.TB test is frequently found to have higher sensitivity than the TST. In addition, and unlike the TST, our T-SPOT.TB test is not significantly affected by immune-suppression.

 

 

Our T-SPOT.TB test is more specific than the TST, primarily because the antigens in our T-SPOT.TB test do not cross-react in individuals who have had the BCG vaccination or who have been infected with most other non-tuberculous mycobacteria.

 

 

Our T-SPOT.TB test requires a simple blood draw and therefore does not require specifically trained healthcare workers to administer the test.

 

 

There is no requirement for a return visit in 48 to 72 hours to obtain our T-SPOT.TB test result. This makes the testing process more convenient for patients and avoids the costs of readministering the test to those who fail to return to have the TST read.

 

 

Our T-SPOT.TB test does not suffer from the “boosting” phenomenon that can affect the TST because there is no injection of immunogenic substances into the body. Consequently, with our T-SPOT.TB test, screening of new healthcare workers can be condensed to a single visit, rather than the two-step testing that is recommended when using the TST, which entails four visits.

 

 

The combination of our T-SPOT.TB test’s greater accuracy and its logistical benefits means that the adoption of our T-SPOT.TB test can improve patient care while reducing costs for institutions.

Our strategy

Our near-term objective is to increase adoption of our T-SPOT.TB test for screening and detecting persons with LTBI. Our longer-term objective is to leverage our proprietary T-SPOT technology platform, immunology domain expertise and regulatory experience, to cost-effectively introduce other high-value immunology-based diagnostic tests. To achieve these objectives, our strategy is to:

 

 

Accelerate adoption of our T-SPOT.TB test in proven market segments in the United States.

 

 

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Expand into other market segments in the United States.

 

 

Expand our sales presence outside the United States.

 

 

Expand our addressable market outside the United States.

 

 

Launch new diagnostic tests.

Our technology platform

Our proprietary T-SPOT technology platform allows us to efficiently measure marker-specific T cell responses at a single-cell level and thereby inform the diagnosis, prognosis and monitoring of patients with immunologically controlled diseases. By measuring T cells, we can provide additional data to clinicians that are not available through other methods, such as molecular diagnostics. For example, LTBI cannot be diagnosed by a molecular test (that is, a test relying on the identification of genomic material from the TB bacterium).

Our research and development efforts are focused on developing new diagnostic tests that use our quantitative T cell measurement technology. T cells are a central component of the human body’s immune system and are implicated in the control and progression of many medical conditions, including certain types of infectious diseases, cancers and autoimmune diseases. Therefore, we believe that our technology platform has potential to be deployed more broadly for other diseases and conditions. Our initial focus is on assays that would help transplant physicians better manage patients at risk of rejection and infection. Because the antigens in this context are largely known, reducing the lead time required for antigen discovery, we believe that we may be able to develop a test for use in the transplant market more quickly and with less development risk. In addition, because we already have sales penetration in hospitals where such centers are generally located, we believe that we may be able to efficiently build upon our existing sales and marketing infrastructure in order to introduce a test in this market. Given that intensive patient monitoring is required in the first few years post-surgery, we believe that this can be a significant market for our tests. We believe our market opportunity in the transplant segment could be as high as $500 million annually.

Risks associated with our business

An investment in our ordinary shares involves a high degree of risk. Among these important risks are the following:

 

 

We have a history of losses and anticipate that we will incur continued losses for at least the next few years. We cannot be certain that we will achieve or sustain profitability.

 

 

We are currently a single-product company that is heavily dependent on the successful further commercialization of our T-SPOT.TB test, and if we encounter delays or difficulties in the commercialization of this product, our business could be harmed.

 

 

The commercial success of our T-SPOT.TB test will depend upon the degree of market acceptance by hospitals and public health departments, as well as physicians and others in the medical community.

 

 

The success of our T-SPOT.TB test depends on the continued demand for diagnostic products for tuberculosis.

 

 

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New market opportunities may not develop as quickly as we expect, limiting our ability to market and sell our T-SPOT.TB test successfully.

 

 

Our T-SPOT.TB test competes with other diagnostic testing methods that may be more widely accepted than our test, and may compete with new diagnostic tests that may be developed by others in the future, which could impair our ability to maintain and grow our business and remain competitive.

 

 

If we are unable to maintain and expand our network of direct sales representatives and independent distributors, we may not be able to generate anticipated sales.

For additional information about the risks we face, please see the section of this prospectus captioned “Risk factors.”

Implications of being an emerging growth company

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an emerging growth company as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies that are not emerging growth companies. These provisions include:

 

 

only two years of audited financial statements in addition to any required unaudited interim financial statements, with correspondingly reduced disclosure in the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus;

 

 

reduced disclosure about our executive compensation arrangements;

 

 

no non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; and

 

 

exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would no longer be an emerging growth company if we have more than $1.0 billion in annual revenue as of the end of our fiscal year, we have more than $700.0 million in market value of our shares held by non-affiliates as of the end of our second fiscal quarter or we issue more than $1.0 billion of non-convertible debt over a three-year-period. We may choose to take advantage of some or all of these reduced disclosure obligations.

The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

 

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Scheme of arrangement

On October 2, 2013, Oxford Immunotec Global PLC completed a scheme of arrangement under the laws of England and Wales, or the Scheme of Arrangement, which was approved by the High Court of Justice in England and Wales, whereby holders of equity interests in Oxford Immunotec Limited, a private limited company incorporated in England and Wales, including holders of ordinary shares, preferred ordinary shares, options and warrants, exchanged their interests in Oxford Immunotec Limited for identical interests in Oxford Immunotec Global PLC, a public limited company incorporated in England and Wales, which then became the parent company of Oxford Immunotec Limited.

Exchange rate information

Throughout this prospectus, we present certain figures that have been converted to U.S. Dollars. Unless otherwise noted, these figures have been converted using the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. The rates represent the noon buying rate in New York for cable transfers payable in foreign currencies as of August 30, 2013. No representation is made that the foreign currency amounts referred to in this prospectus could have been or could be converted into U.S. Dollars at any particular rate or at all.

The following table sets forth information concerning exchange rates between the foreign currencies indicated and the U.S. Dollar on August 30, 2013. These rates are provided solely for your convenience and are not necessarily the exchange rates that we will use in the preparation of our periodic reports or any other information to be provided to you.

 

Currency:   Noon Buying Rate:

Pound Sterling (U.S.$/£)

  1.5468

Yen (¥/U.S.$)

  98.2200

Euro (U.S.$/)

  1.3196

Renminbi (RMB/U.S.$)

  6.1193

Corporate information

Oxford Immunotec Global PLC was incorporated in England and Wales in 2013. Our principal executive offices are located at 94C Innovation Drive, Milton Park, Abingdon, OX14 4RZ, United Kingdom, and our telephone number is +44 (0) 1235 442 780. Our internet website is www.oxfordimmunotec.com. The information on, or that can be accessed through, our website is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase our ordinary shares.

We use “T-SPOT®,” “T-Cell Xtend®,” “Oxford Diagnostic Laboratories®,” “ODL®,” the Oxford Immunotec logo, our laboratory logo and other marks as trademarks in the United States and other countries. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

 

 

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The offering

 

Ordinary shares offered by us

5,360,000 shares

 

Ordinary shares to be outstanding after this offering

16,362,733 shares1

 

Option to purchase additional shares

The underwriters have an option for a period of 30 days to purchase up to 804,000 additional ordinary shares to cover overallotments.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $63.8 million, or approximately $74.3 million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering: (1) to hire additional sales, marketing and customer service personnel and expand marketing programs both in the United States and outside the United States; (2) to fund research and development programs dedicated to development of new diagnostic tests in the field of immunology; (3) to repay indebtedness outstanding under our senior secured term debt and related accrued interest; and (4) for working capital and other general corporate purposes. See “Use of proceeds.”

 

Dividend policy

We have never paid or declared any cash dividends on our ordinary shares, and we do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. See “Dividend policy.”

 

Risk factors

You should read the “Risk factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in our ordinary shares.

 

Proposed NASDAQ Global Market symbol

“OXFD”

The number of ordinary shares to be outstanding after this offering is based on 10,605,908 ordinary shares outstanding as of November 7, 2013 and excludes the following:

 

 

1,306,147 ordinary shares issuable upon exercise of share options outstanding as of November 7, 2013 at a weighted-average exercise price of $0.48 per share;

 

 

19,473 ordinary shares issuable upon the exercise of warrants outstanding as of November 7, 2013 at a weighted-average exercise price of $0.67 per share; and

 

 

2,684,563 ordinary shares reserved for future issuance under our equity incentive plans as of November 7, 2013.

 

 

1    The number of ordinary shares to be outstanding after this offering includes an estimated 396,825 shares to be issued to Fosun Industrial Co., Ltd. upon conversion of a convertible promissory note immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. See “Liquidity and capital resources—Convertible promissory note.”

 

 

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Unless otherwise indicated, this prospectus reflects and assumes the following:

 

 

completion of the Scheme of Arrangement;

 

 

the 1-for-6.705 reverse share split of our ordinary shares, which was effected on November 7, 2013;

 

 

the conversion of all outstanding preferred ordinary shares and A ordinary shares into                  ordinary shares, which will occur automatically in connection with this offering;

 

 

the amended articles of association, to be effective upon the closing of this offering; and

 

 

no exercise by the underwriters of their option to purchase up to 804,000 additional ordinary shares in this offering.

 

 

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Summary consolidated financial data

The following tables summarize our consolidated financial and other data. The consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2012 and 2013 and the consolidated balance sheet data as of September 30, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus.

On October 2, 2013, we completed the Scheme of Arrangement. Prior to the Scheme of Arrangement, our business was conducted by Oxford Immunotec Limited and its consolidated subsidiaries. Following the Scheme of Arrangement, our business has been conducted by Oxford Immunotec Global PLC and its consolidated subsidiaries, including Oxford Immunotec Limited.

We have prepared the unaudited consolidated interim financial information presented below on the same basis as our audited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and our results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. You should read the summary of our financial data set forth below together with our financial statements and the related notes to those statements, as well as “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The summary financial data in this section are not intended to replace our financial statements and the accompanying notes.

 

 

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      Year ended December 31,     Nine months ended
September 30,
 
(in thousands, except share and per share
data) (unaudited)
   2011     2012     2012     2013  

 

 

Consolidated statement of operations data:

        

Revenue

   $ 12,641      $ 20,685      $ 15,406      $ 28,559   

Cost of revenue

     8,417        12,424        9,123        14,165   
  

 

 

 

Gross profit

     4,224        8,261        6,283        14,394   

Operating expenses:

        

Research and development

     1,780        1,947        1,232        1,583   

Sales and marketing

     10,536        11,177        7,895        9,557   

General and administrative

     5,232        8,068        5,784        8,457   
  

 

 

 

Total operating costs

     17,548        21,192        14,911        19,597   
  

 

 

 

Loss from operations

     (13,324     (12,931     (8,628     (5,203

Other (expense) income

     101        (2,103     (1,944     (98
  

 

 

 

Loss before provision for income taxes

     (13,223     (15,034     (10,572     (5,301

Income tax provision (benefit)

     (119     (151     21        35   
  

 

 

 

Net loss

   $ (13,104   $ (14,883   $ (10,593   $ (5,336
  

 

 

 

Net loss per share attributable to ordinary shareholders, basic and diluted

   $ (1.61   $ (1.26   $ (1.02   $ (0.35
  

 

 

 

Weighted-average shares used to compute net loss attributable to ordinary shareholders, basic and diluted

     8,150,146        11,825,803        10,338,893        15,129,791   
  

 

 

 

Pro forma (loss) per share, basic and diluted (1)

     $ (1.79     $ (0.49
    

 

 

     

 

 

 

Pro forma weighted-average number of shares, basic and diluted

       8,336,899          10,727,827   
    

 

 

     

 

 

 

Supplemental financial metric:

        

Adjusted EBITDA(2)

   $ (12,519   $ (12,131   $ (8,057   $ (4,296

 

 

 

 

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     As of December 31,         

As of

September 30, 2013

 
 

 

 

     

 

 

 
    2011     2012         Actual    

Pro

forma(1)

 

 

 

Consolidated balance sheet data:

  

Cash and cash equivalents

  $ 2,334      $ 12,578        $ 13,035      $ 72,554   

Total assets

    9,639        25,483          31,538        89,166   

Total liabilities

    4,413        8,534          17,335        9,974   

Total shareholders’ equity

  $ 5,226      $ 16,949        $ 14,203      $ 79,192   

Shares outstanding:

         

Preferred ordinary shares

    37,642,730        48,955,690          55,435,513          

Ordinary shares

    8,492,175        14,442,575          15,677,098        15,965,908   

 

 

 

 

(1)   The pro forma data gives effect to the Scheme of Arrangement, which was completed on October 2, 2013, the 1-for-6.705 reverse share split of our ordinary shares effected on November 7, 2013, the conversion of all outstanding preferred ordinary shares and A ordinary shares into an aggregate of 8,279,633 ordinary shares in connection with this offering, the repayment of indebtedness outstanding under our senior secured term debt and our issuance and sale of 5,360,000 ordinary shares at an assumed initial public offering price of $14.00 per share, the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)   Adjusted EBITDA is a non-GAAP financial measure that we calculate as profit (loss), adjusted for tax benefit and impairment (expense), unrealized exchange fluctuations, interest expense, interest income, depreciation and amortization and share-based compensation. We believe that Adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results in the same manner as our management and Board of Directors. Our presentation of Adjusted EBITDA is not made in accordance with U.S. GAAP, and our computation of Adjusted EBITDA may vary from others in the industry. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For example, Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations.

The following table presents a reconciliation of net income (loss), the most comparable U.S. GAAP financial measure, to Adjusted EBITDA for each of the periods indicated:

 

      Year ended
December 31,
    Nine months ended
September 30,
 
(in thousands)    2011     2012     2012     2013  

 

 

Reconciliation of (loss) profit to Adjusted EBITDA

        

Net loss

   $ (13,104   $ (14,883   $ (10,593   $ (5,336
  

 

 

 

Income tax provision (benefit)

     (119     (151     21        35   

Interest income

     (1     (1              

Interest expense

     4        1,478        1,452        256   

Depreciation and amortization

     630        801        580        863   
  

 

 

 

EBITDA

     (12,590     (12,756     (8,540     (4,182
  

 

 

 

Reconciling items:

        

Share-based compensation expense

     125        79        59        77   

Unrealized exchange gains (losses)

     (54     546        424        (191
  

 

 

 

Adjusted EBITDA

   $ (12,519   $ (12,131   $ (8,057   $ (4,296

 

 

 

 

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Risk factors

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding whether to invest in our ordinary shares. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our ordinary shares could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks related to our business.

We have a history of losses and anticipate that we will incur continued losses for at least the next few years. We cannot be certain that we will achieve or sustain profitability.

We were founded in 2002 and to date we have engaged primarily in development, clinical testing and marketing of our T-SPOT.TB test. We have never been profitable. For the fiscal years ended December 31, 2011 and 2012, we had net losses of $13.1 million and $14.9 million, respectively, and we had an accumulated deficit at December 31, 2012 of $91.0 million. For the nine months ended September 30, 2012 and 2013, we had net losses of $10.6 million and $5.3 million, respectively, and we had an accumulated deficit at September 30, 2013 of $96.3 million. Substantially all of our operating losses in these periods resulted from costs incurred in connection with sales and marketing of our T-SPOT.TB test, general and administrative costs associated with our operations and our research and development programs. Additionally, as a result of our anticipated future significant expenses relating to expansion of our sales and marketing capabilities, further commercialization of our T-SPOT.TB test, and research and development, we expect to continue to incur significant operating losses for at least the next few years, even though we generate revenue from our T-SPOT.TB test. Because of the numerous risks and uncertainties associated with developing and commercializing diagnostic products, we are unable to predict the magnitude of these future losses. Our historic losses, combined with expected future losses, have had and will continue to have an adverse effect on our cash resources, shareholders’ deficit and working capital. We expect our research and development expenses to be substantial for at least the next few years as we work to develop other product candidates based on our T-SPOT technology.

Our ability to become profitable depends upon our ability to generate revenue. In 2004, we began to generate revenue from the sale and marketing of our T-SPOT.TB test, but we may not be able to generate sufficient revenue to attain profitability. Our ability to generate profits on sales of our T-SPOT.TB test is subject to market acceptance in market segments we currently serve as well as in new market segments and new geographies. In addition, we may be compelled to sell our T-SPOT.TB test at lower prices if, for example, our customers or prospective customers are unwilling to pay for our tests at current pricing levels or as a result of increased competition generally. Any price erosion would impede our ability to generate revenue. If we are unable to generate sufficient revenue, we will not become profitable and may be unable to continue operations without continued funding.

 

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We are currently a single-product company that is heavily dependent on the successful further commercialization of our T-SPOT.TB test and, if we encounter delays or difficulties in the further commercialization of this product, our business could be harmed.

Our success is heavily dependent upon the successful further commercialization of our T-SPOT.TB test. Our business could be materially harmed if we encounter difficulties in the further commercialization of this product, including, among others: failure to achieve sufficient market acceptance by hospitals and public health departments as well as physicians, third-party payors and others in the medical community; the inability to compete with other diagnostic methods, including the TST; the inability to maintain and expand our sales, marketing and distribution networks; the inability to manage anticipated growth; the inability to obtain and/or maintain necessary regulatory approvals; and the inability to effectively protect our intellectual property.

The commercial success of our T-SPOT.TB test will depend upon the degree of market acceptance by hospitals and public health departments, as well as physicians and others in the medical community.

Our T-SPOT.TB test may not gain sufficient market acceptance by hospitals and public health departments. If this product does not achieve an adequate level of acceptance by such customer groups, we may not generate enough revenue to become profitable. The degree of market acceptance of our T-SPOT.TB test will depend on a number of factors, including:

 

 

clinical guidelines relative to the screening for, and diagnosis and monitoring of, TB infection;

 

 

the efficacy and potential advantages of our T-SPOT.TB test over alternative tests;

 

 

the willingness of our target customers to accept and adopt our T-SPOT.TB test;

 

 

the ability to offer attractive pricing for our T-SPOT.TB test;

 

 

the strength of marketing and distribution support and the timing of market introduction of competitive products; and

 

 

outcomes from clinical studies and other publicity concerning our T-SPOT.TB test or competing products.

Our efforts to educate physicians and other members of the medical community on the benefits of our T-SPOT.TB test may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by conventional technologies marketed by our competitors. In particular, continuing to gain market acceptance for our T-SPOT.TB test in nascent markets could be challenging. In certain markets, including, for example, Japan and China, our potential for future growth is difficult to forecast. If we were to incorrectly forecast our ability to penetrate these markets, expenditures that we make may not result in the benefits that we expect, which could harm our results of operations. Moreover, in the event that our T-SPOT.TB test is the subject of guidelines, clinical studies or scientific publications that are unhelpful or damaging, or otherwise call into question the benefits of our T-SPOT.TB test, we may have difficulty in convincing prospective customers to adopt our test.

 

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The success of our T-SPOT.TB test depends on the continued demand for diagnostic products for tuberculosis.

Even if we achieve market acceptance, our success will depend on continued demand for diagnostic products for tuberculosis. Tuberculosis screening policies could change such that tests are conducted less frequently or in fewer instances. For example, healthcare institutions facing increased cost control requirements could determine to reduce employee testing. In addition, various institutions or governing bodies may decide that the incidence of TB has dropped sufficiently within their screening population so as to permit reduced testing (e.g., U.S. military guidelines were recently updated such that testing may now be required in fewer instances than under previous guidelines). If there are widespread testing policy changes that substantially reduce testing in the markets we serve, our business could be materially and adversely affected.

New market opportunities may not develop as quickly as we expect, limiting our ability to market and sell our T-SPOT.TB test successfully.

We intend to take steps to increase the presence of our T-SPOT.TB test in new markets both in the United States and outside the United States. We believe these opportunities will take substantial time to develop or mature and we cannot be certain that these market opportunities will develop as we expect. The future growth and success of our T-SPOT.TB test in these markets depends on many factors beyond our control, including recognition and acceptance by the scientific community in that market and the prevalence and costs of competing methods of tuberculosis screening. If the markets for our T-SPOT.TB test do not develop as we expect, our business may be adversely affected.

Our T-SPOT.TB test competes with other diagnostic testing methods that may be more widely accepted than our test, and may compete with new diagnostic tests that may be developed by others in the future, which could impair our ability to maintain and grow our business and remain competitive.

The clinical diagnostics market is highly competitive, and we must be able to compete effectively against existing and future competitors in order to be successful. In selling our T-SPOT.TB test, we compete primarily with existing diagnostic technologies, particularly the TST, which is widely used as a test for diagnosing tuberculosis. In addition, we compete with the QuantiFERON®-TB Gold In-Tube test1, or QFN, which, like our T-SPOT.TB test, employs an interferon-gamma release assay, or IGRA, method for diagnosing tuberculosis. If we are unable to differentiate our diagnostic tests from those of our competitors, our business may be materially and adversely affected. In addition, improvements in these technologies or the development of new technologies for diagnosing tuberculosis and the introduction of products that compete with our T-SPOT.TB test could adversely impact our ability to sell our T-SPOT.TB test or the sales price of the test. This could impact our ability to market our test and/or secure a distribution partner, both of which could have a substantial impact on the value of our T-SPOT.TB test.

We also face competition in the development, manufacture, marketing and commercialization of diagnostic products from a variety of other sources, such as academic institutions, government agencies, research institutions and other life sciences companies. These competitors are working to develop and market other diagnostic tests, systems, products and other methods of detecting, preventing or reducing tuberculosis.

 

1   

QuantiFERON is a registered trademark of Qiagen N.V.

 

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Among the many experimental diagnostics being developed around the world, there may be diagnostics unknown to us that may compete with our T-SPOT.TB test. Many of our potential competitors have much greater capital resources, manufacturing, research and development resources and production facilities than we do. Competitors with greater resources may be able to offer tests and/or services at prices at which we are unable to compete and more quickly develop improvements than we are. Many of them may also have more experience than we have in preclinical testing and clinical trials of new diagnostic tests.

In our service offering, we also may face competition from commercial laboratories, including large national and regional laboratories, which may be able to offer access to TB testing. These laboratories may have perceived advantages over our solution, including phlebotomy services, established payor relationships and dedicated courier services. For example, as we seek to further penetrate the physicians’ office segment of the U.S. market, we may find that physicians have established relationships with commercial laboratories that offer physicians additional services, such as phlebotomy, and a wider range of available laboratory tests that a physician may choose to order in addition to a TB test. Further, some commercial laboratories may be able to offer their services at lower cost to physicians’ patients due to the reimbursement arrangements these laboratories may have established with third-party payors. These factors may make it difficult for us to convince physicians to use our test and service offering.

The markets for our T-SPOT.TB test are subject to changing technology, new product introductions and product enhancements, and evolving industry standards. The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete or result in short product life cycles or our inability to sell our T-SPOT.TB test without offering a significant discount.

If we are unable to maintain and expand our network of direct sales representatives and independent distributors, we may not be able to generate anticipated sales.

We have limited experience marketing and selling our T-SPOT.TB test. Our operating results are directly dependent upon the sales and marketing efforts of not only our employees, but also our independent distributors. We expect our direct sales representatives and independent distributors to develop long-lasting relationships with the providers they serve. If our direct sales representatives or independent distributors fail to adequately promote, market and sell our product, our sales could significantly decrease.

We face significant challenges and risks in managing our geographically dispersed sales and distribution network and retaining the individuals who make up that network. If a substantial number of our direct sales representatives were to leave us within a short period of time, or if a substantial number of our independent distributors were to cease to do business with us within a short period of time, our sales could be adversely affected. If any significant independent distributor were to cease to distribute our product, our sales could be adversely affected. In such a situation, we may need to seek alternative independent distributors or increase our reliance on our direct sales representatives, which may not prevent our sales from being adversely affected. If a direct sales representative or independent distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the intense competition for their services, we may be unable to recruit additional qualified independent distributors or to hire additional qualified direct sales representatives to work with us. We may also not be able to enter into agreements with them on favorable or commercially

 

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reasonable terms, if at all. Failure to hire or retain qualified direct sales representatives or independent distributors would prevent us from expanding our business and generating sales. See “—Certain of our customers account for a significant portion of our revenue.”

As we launch new products and increase our sales, marketing and distribution efforts with respect to our T-SPOT.TB test, we will need to expand the reach of our sales, marketing and distribution networks. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled direct sales representatives and independent distributors with significant technical knowledge in various areas. New hires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase our sales.

If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our product, which would adversely affect our business, results of operations and financial condition.

Health insurers and other third-party payors may decide not to cover, or may discontinue reimbursing, our T-SPOT.TB test or any other diagnostic tests we may develop in the future, or may provide inadequate reimbursement, which could jeopardize our ability to expand our business.

Although for many of our current customers, including those in the hospital and public health segments, the cost of screening their employees for tuberculosis is not reimbursable, our business is somewhat impacted, and in the future may be more greatly impacted, by the level of reimbursement from third-party payors. In the United States, the regulatory process allows diagnostic tests to be marketed regardless of any coverage determinations made by payors. For new diagnostic tests, each third-party payor makes its own decision about which tests it will cover, how much it will pay and whether it will continue reimbursing the test. Clinicians may order diagnostic tests that are not reimbursed by third-party payors if the patient is willing to pay for the test without reimbursement, but coverage determinations and reimbursement levels and conditions are important to the commercial success of a diagnostic product.

The Centers for Medicare & Medicaid Services, or CMS, establishes reimbursement payment levels and coverage rules for Medicare. CMS currently covers our T-SPOT.TB test. If CMS were to place significant restrictions on the use of our tests, reduce payment amounts or eliminate coverage altogether, our ability to generate revenue from our diagnostic tests could be limited. For example, payment for diagnostic tests furnished to Medicare beneficiaries is made based on a fee schedule set by CMS. Payments under these fee schedules have decreased in recent years and may decrease further in the future.

In addition, state Medicaid plans and private commercial payors establish rates and coverage rules independently. As a result, the coverage determination process is often a time-consuming and costly process that requires us to provide scientific and clinical support for the use of our tests to each payor separately, with no assurance that coverage or adequate reimbursement will be obtained. Even if one or more third-party payors decides to reimburse for our tests, that payor may reduce utilization or stop or lower payment at any time, which could reduce our revenue. We cannot predict whether or when third-party payors will cover our tests or offer adequate reimbursement to make them commercially attractive. Clinicians may decide not to order our tests if inadequate third-party payments result in additional costs to the patient.

 

 

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We are also subject to foreign reimbursement schemes in the international markets we serve, including Germany, Switzerland, France and Japan. Decisions by health insurers or other third-party payors in these markets not to cover, or to discontinue reimbursing could materially and adversely affect our business.

If we do not achieve, sustain or successfully manage our anticipated growth, our business and growth prospects may be harmed.

We have experienced significant revenue growth in a relatively short period of time. We may not achieve similar growth rates in future periods. Investors should not rely on our operating results for any prior periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our share price could decline. Furthermore, growth will place significant strains on our management and our internal systems and processes, as well as potentially those of our suppliers.

Further development and commercialization of our T-SPOT.TB test and other diagnostic product candidates will require us to expand our sales, marketing and distribution networks. If we cannot effectively manage our expanding operations and our costs, we may not be able to continue to grow or we may grow at a slower pace and our business could be adversely affected.

We depend upon a limited number of suppliers, and certain components of our product may only be available from a sole source or limited number of suppliers.

Our T-SPOT.TB test is generally assembled by us from supplies we obtain from a limited number of suppliers. Critical components required to assemble our tests may only be available from a sole or limited number of component suppliers. For example, we source key components of our T-SPOT.TB test from EMD Millipore Corporation, Stemcell Technologies Inc., Mabtech AB, MicroCoat Biotechnologie GmbH and Life Technologies Corporation, any of whom would be difficult to replace. Even if the key components that we source are available from other parties, the time and effort involved in obtaining any necessary regulatory approvals for substitutes could impede our ability to replace such components timely or at all. The loss of a sole or key supplier would impair our ability to deliver products to our customers in a timely manner and would adversely affect our sales and operating results and negatively impact our reputation. Our business would also be harmed if any of our suppliers could not meet our quality and performance specifications and quantity and delivery requirements.

Certain of our customers account for a significant portion of our revenue.

We sell our T-SPOT.TB test through a direct sales force in the United States, certain European countries and Japan. In Japan, while we maintain end-user relationships through our direct sales force, we sell through a single importer of record, Riken Genesis Co., Ltd., or Riken. In other parts of the world, we sell through distributors. For example, in China, we sell through a single distributor, Shanghai Fosun Long March Medical Science Co. Ltd., or Fosun. For the nine months ended September 30, 2013, sales to Fosun and through Riken together accounted for 34% of our total revenue, with Fosun accounting for 17%. In the event that either of these customers or any other significant customer substantially reduces its purchases of our products, particularly if this occurs without adequate advance notice to enable us to secure alternate importation or distribution arrangements, our results of operations could be materially and adversely affected.

 

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We or our suppliers may experience development or manufacturing problems or delays that could limit the growth of our revenue or increase our losses.

We may encounter unforeseen situations in the manufacturing and assembly of our T-SPOT.TB test that would result in delays or shortfalls in our production. Our suppliers may also face similar delays or shortfalls. In addition, our or our suppliers’ production processes and assembly methods may have to change to accommodate any significant future expansion of our manufacturing capacity, which may increase our or our suppliers’ manufacturing costs, delay production of our product, reduce our product margin and adversely impact our business. If we are unable to keep up with demand for our product by successfully manufacturing and shipping our product in a timely manner, our revenue could be impaired, market acceptance for our product could be adversely affected and our customers might instead purchase our competitors’ products. In addition, developing manufacturing procedures for new products would require developing specific production processes for those products. Developing such processes could be time consuming, and any unexpected difficulty in doing so can delay the introduction of a product.

We currently perform our tests for our service offering exclusively in one laboratory facility in the United States and one laboratory in the United Kingdom. If these or any future facilities or our equipment were damaged or destroyed, or if we experience a significant disruption in our operations for any reason, our ability to continue to operate our business could be materially harmed.

We currently perform our T-SPOT.TB test for our service offering in the United States exclusively in a single laboratory facility in Memphis, Tennessee, and in the United Kingdom exclusively in a single laboratory facility in Abingdon, England. If these or any future facilities were to be damaged, destroyed or otherwise unable to operate, whether due to fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee malfeasance, terrorist acts, power outages, or otherwise, or if performance of our laboratories is disrupted for any other reason, we may not be able to perform our tests or generate test reports as promptly as our customers expect, or possibly not at all. Building or finding a replacement facility could be difficult, expensive and time consuming and any new laboratory would need to satisfy the various certification, accreditation and licensing requirements to which our current laboratory facilities are subject, including, for example, CLIA requirements in the United States. If we are unable to perform our tests or generate test reports within a timeframe that meets our customers’ expectations, our business, financial results and reputation could be materially harmed.

As of September 30, 2013, we maintain insurance coverage totaling $6.5 million against damage to our property and equipment and an additional $22 million to cover business interruption and research and development restoration expenses, subject to deductibles and other limitations. If we have underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses. Even if we cover our losses, our business, financial results and reputation could be materially harmed.

Billing complexities associated with obtaining payment or reimbursement for our tests may negatively affect our revenue, cash flow and profitability.

Although third-party payors account for only 4% of our total revenue for the year ended December 31, 2012, we currently rely in part, and may in the future more heavily rely, on obtaining third-party payment or reimbursement for our test. Billing for diagnostic tests is complex. We or our customers receive payment from individual patients and from a variety of

 

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payors, such as commercial insurance carriers, including managed care organizations and governmental programs, primarily Medicare and Medicaid in the United States. Each payor typically has different billing requirements, and the billing requirements of many payors have become increasingly stringent.

Among the factors complicating our billing of third-party payors are:

 

 

disputes among payors as to which party is responsible for payment;

 

 

disparity in coverage among various payors;

 

 

disparity in information and billing requirements among payors; and

 

 

incorrect or missing billing information, which is required to be provided by the ordering physician.

These billing complexities, and the related uncertainty in obtaining payment for our tests, could negatively affect our revenue, cash flow and profitability.

We may require substantial additional resources to fund our operations. We may not be able to obtain additional capital resources on favorable terms and if we cannot find additional capital resources, we may have difficulty operating our business. Raising additional capital may also cause dilution to our existing shareholders.

As of September 30, 2013, we had cash and cash equivalents of $13.0 million and working capital of $16.3 million. We believe that after this offering we will have sufficient resources to fund our projected operations for at least the next few years. However, changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available financial resources sooner than we currently anticipate. In order to fund our strategic plans, we may need to enter into a strategic collaboration or raise additional capital. We may seek to raise additional capital through the issuance of equity or debt securities in the public or private markets, or through a collaborative arrangement or sale of assets. Additional financing opportunities may not be available to us, or if available, may not be on favorable terms. Further, to the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder.

Our future capital requirements will depend on many factors, including revenue generated from the sale of our T-SPOT.TB test, margins, operating expenses and our ability to control costs associated with our operations, and the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights. The availability of additional capital will also depend on many factors, including the market price of our ordinary shares and the availability and cost of additional equity capital from existing and potential new investors, our ability to retain the listing of our ordinary shares on The NASDAQ Global Market and general economic and industry conditions affecting the availability and cost of capital.

Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates beyond the rights we have already relinquished, or grant licenses on terms that are not favorable to us.

 

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Failure in our information technology or storage systems could significantly disrupt our operations and our research and development efforts, which could adversely impact our revenue, as well as our research, development and commercialization efforts.

Our ability to execute our business strategy depends, in part, on the continued and uninterrupted performance of our information technology, or IT, systems, which support our operations, including our laboratory information system, or LIS, our billing system, and our customer interfaces. Due to the sophisticated nature of the technology we use in our laboratories and our complex billing procedures, we are substantially dependent on our IT systems. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data, and in particular to operate our LIS and billing system, could adversely affect our ability to operate our business. Any interruption in the operation of our LIS or billing system, due to IT system failures, part failures or potential disruptions in the event we are required to relocate our IT systems within our facility or to another facility could have an adverse effect on our operations.

We rely on courier delivery services to transport samples to our facilities for testing. If these delivery services are disrupted, our business and customer satisfaction could be negatively impacted.

Customers in the United States and the United Kingdom ship samples to us by air and ground express courier delivery service for testing in our Memphis, Tennessee and Abingdon, England facilities. If we suffer from disruptions in delivery service, whether due to bad weather, natural disaster, terrorist acts or threats, or for other reasons, we may be unable to provide timely services to customers or at all. As a result, such disruptions could materially and adversely affect our financial results and our reputation.

Because our business relies heavily on international operations and revenue, changes in currency exchange rates and our need to convert currencies may negatively affect our financial condition and results of operations.

Our business relies heavily on our operations outside the United States. For the year ended December 31, 2012, 50% of our total revenue was derived from sales outside the United States and for the nine months ended September 30, 2013, 56% of our total revenue was derived from sales outside the United States. Because we currently operate in three major regions of the world (the United States, Europe and rest of world, or Europe & ROW, and Asia), our revenue is denominated in multiple currencies. Sales in the United States are denominated in U.S. Dollars. Sales in China are denominated in U.S. Dollars and sales in Japan are denominated in Yen but, in each case, these sales are made by our U.K.-based legal entity where the Pound Sterling is the functional currency. As a result, these sales are subject to remeasurement into Pounds Sterling and then translation into U.S. Dollars when we consolidate our financial statements. Sales in Europe are denominated primarily in the Pound Sterling and Euro. As we grow Europe & ROW sales outside the United Kingdom and the European Union countries whose national currency is the Euro, or the Euro Zone, we will be subject to exchange rate risk from additional currencies. As a result, our exchange rate exposure may change over time as our business practices evolve and could result in increased costs or reduced revenue and could affect our actual cash flow.

 

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Changes in the relative values of currencies occur regularly and, in some instances, may have a significant impact on our operating results. We cannot predict with any certainty changes in currency exchange rates or the degree to which we can effectively mitigate these risks.

Our future success depends on our ability to successfully develop, obtain clearance or approval for and commercialize new products.

Our future success partially depends on our ability to successfully develop and market new products. Our ability to develop any of these products is dependent on a number of factors, including funding availability to complete development efforts, our ability to develop products that adequately detect or measure the targeted function, condition or disease, our ability to secure required FDA or other regulatory clearance or approval, our ability to obtain licenses to necessary third-party intellectual property and our ability to commercialize our products, thereby generating revenue once development efforts prove successful. We may encounter problems in the development phase for our products, which can result in substantial setbacks and delays or abandonment of further work on the potential product. There can be no assurance that we will not encounter such setbacks with the products in our pipeline, or that funding from outside sources and our revenue will be sufficient to bring any future product to the point of commercialization. There can be no assurance that the products we seek to develop will work effectively in the marketplace, or that we will be able to produce them on an economical basis. As with our current T-SPOT.TB test, the success of any future products will also depend upon the degree of market acceptance by physicians, hospitals, third-party payors and others in the medical community.

We may seek to grow our business through acquisitions of or investments in new or complementary businesses, products or technologies, and the failure to manage acquisitions or investments, or the failure to integrate them with our existing business, could have a material adverse effect on us.

From time to time we expect to consider opportunities to acquire or make investments in other technologies, products and businesses that may enhance our capabilities, complement our current products or expand the breadth of our product offerings, markets or customer base. Potential and completed acquisitions and strategic investments involve numerous risks, including:

 

 

problems assimilating the purchased technologies, products or business operations;

 

issues maintaining uniform standards, procedures, controls and policies;

 

unanticipated costs associated with acquisitions;

 

diversion of management’s attention from our core business;

 

adverse effects on existing business relationships with suppliers and customers;

 

risks associated with entering new markets in which we have limited or no experience;

 

potential loss of key employees of acquired businesses; and

 

increased legal and accounting compliance costs.

We have no current commitments with respect to any acquisition or investment. Any acquisitions we undertake could be expensive and time consuming, and may disrupt our ongoing business and prevent management from focusing on our operations. If we are unable to manage acquisitions or investments, or integrate any acquired businesses, products or technologies effectively, our business, results of operations and financial condition may be materially adversely affected.

 

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Our business could suffer if we lose the services of, or are unable to attract and retain, key members of our senior management, key advisors or other personnel.

We are dependent upon the continued services of key members of our senior management and a limited number of key advisors and personnel. In particular, we are highly dependent on the skills and leadership of our Chief Executive Officer, Dr. Peter Wrighton-Smith, and the other members of management named in the “Management” section elsewhere in this prospectus. The loss of any one of these individuals could disrupt our operations or our strategic plans. Additionally, our future success will depend on, among other things, our ability to continue to hire and retain the necessary qualified scientific, technical, sales, marketing and managerial personnel, for whom we compete with numerous other companies, academic institutions and organizations. The loss of members of our management team, key advisors or personnel, or our inability to attract or retain other qualified personnel or advisors, could have a material adverse effect on our business, results of operations and financial condition. Although all members of our senior management team have entered into agreements that restrict their ability to compete with us for a period of time after the end of their employment, we may be unable to enforce such restrictive covenants at all or for a sufficient duration of time to prevent members of our management team from competing with us.

The outcome of any future claims and litigation could have a material adverse impact on our business, financial condition and results of operations.

We may, from time to time, be party to litigation in the normal course of business, including class action lawsuits. Due to the inherent uncertainties of litigation, it is not possible to predict the final outcome of these lawsuits or determine the amount of any potential losses we may incur. In the event we are required or determine to pay amounts in connection with any such lawsuits, such amounts could be significant and could have a material adverse impact on our liquidity, business, financial condition and results of operations.

Our ability to use net operating losses to offset future taxable income may be subject to substantial limitations.

As of December 31, 2012, our available U.S. federal net operating losses, or NOLs, totaled $38.1 million and U.S. state loss carryforwards totaled $32.9 million. The amount of these NOLs remains subject to review and possible adjustment by the Internal Revenue Service and state revenue authorities, as applicable. NOLs may become subject to an annual limitation if there is a cumulative change in the ownership interest of significant shareholders (or certain shareholder groups) over a three-year period in excess of 50%, in accordance with rules established under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and similar state rules (we refer to each as an ownership change). Such an ownership change could limit the amount of historic NOLs that can be utilized annually to offset future taxable income. The amount of this annual limitation is determined based on the value of the Company immediately prior to the ownership change. We have completed several financings since its inception that may have resulted in one or more ownership changes or could result in an ownership change in the future. Future changes in our share ownership, some of which are outside of our control, could result in additional ownership changes for purposes of these rules. We are unable to predict future ownership changes or the way an ownership change could limit the use of our NOLs. If we undergo an ownership change in connection with or after this public offering, we may not be able to utilize a material portion of our NOLs even if we attain profitability.

 

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Risks related to regulatory and other legal issues.

If we fail to comply with extensive regulations of domestic and international regulatory authorities, sales of our T-SPOT.TB test in new markets and the development and commercialization of any new product candidates could be delayed or prevented.

Our T-SPOT.TB test is, and any new product candidates will be, subject to extensive government regulations related to development, testing, manufacturing and commercialization in the United States and other countries before we can sell in these markets. The process of obtaining and complying with FDA and other governmental regulatory approvals and regulations is costly, time consuming, uncertain and subject to unanticipated delays. Securing regulatory approval for a new product, in the United States and many other countries, typically requires several years. Despite the time and expense exerted, regulatory approval is never guaranteed. We may not be able to obtain FDA or other required regulatory approval and market any further products we may develop during the time we anticipate, or at all. We also are subject to the following risks and obligations, among others:

 

 

regulators may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied.

 

 

regulators may require additional testing for safety and effectiveness.

 

 

regulators may interpret data from clinical studies in different ways than we interpret them.

 

 

if regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution.

 

 

regulators may change their approval policies and/or adopt new regulations that affect our ability to secure approvals for new products, which would decrease the chance we would be able to commercialize new diagnostic tests.

In addition, some international jurisdictions, such as China, require periodic recertification. Even if we obtain initial certifications from regulatory bodies, we may lose certification after a periodic review. Failure to maintain requisite certifications from regulatory bodies would adversely affect our ability to generate future revenue and operating income.

If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval in the United States or in international jurisdictions, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Furthermore, our suppliers may be subject to similar regulatory oversight, and may not currently be or may not continue to be in compliance with applicable regulatory requirements. Failure by us or one of our suppliers to comply with statutes and regulations administered by the FDA and other regulatory bodies, or failure to take adequate action in response to any observations, could result in, among other things, any of the following enforcement actions:

 

 

warning letters or untitled letters;

 

 

fines and civil penalties;

 

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unanticipated expenditures for corrective actions;

 

 

delays in approving, or refusal to approve, our products;

 

 

withdrawal or suspension of approval by the FDA or other regulatory bodies;

 

 

product recall or seizures;

 

 

interruption of production;

 

 

operating restrictions;

 

 

injunctions; and

 

 

criminal penalties.

If any of these actions were to occur, it could harm our reputation and could cause our product sales and profitability to suffer.

Any regulatory approval of a product may also be subject to limitations on the indicated uses for which the product may be marketed. If the FDA or another regulatory body determines that our promotional materials, training or other activities constitute promotion of an unapproved use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under applicable statutory authorities, such as laws prohibiting false claims for reimbursement.

Additionally, we may be required to conduct costly post-market testing, and we will be required to report adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

Furthermore, the FDA and various other authorities will inspect our facilities and those of our suppliers from time to time to determine whether we are in compliance with regulations relating to the manufacture of diagnostic products, including regulations concerning design, manufacture, testing, quality control, product labeling, distribution, promotion and record-keeping practices. A determination that we are in material violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls, product seizures or, in extreme cases, criminal sanctions.

If we are unable to comply with the requirements of the U.S. Clinical Laboratories Improvement Amendments of 1988 and state laws governing clinical laboratories or if we are required to expend significant additional resources to comply with these requirements, the success of our business could be threatened.

The United States Department of Health and Human Services, or HHS, has classified our T-SPOT.TB test as a high-complexity test under the Clinical Laboratories Improvement Amendments of 1988, commonly referred to as CLIA. Under CLIA, personnel requirements for laboratories conducting high-complexity tests are more stringent than those applicable to

 

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laboratories performing less complex tests. As a result of these personnel requirements, we must employ more experienced or more highly educated personnel and additional categories of employees, which increases our operating costs. If we fail to meet CLIA requirements, HHS or state agencies could require us to cease our T-SPOT.TB testing or other testing subject to CLIA that we may develop in the future. Continued compliance with CLIA requirements may cause us to incur significant expenses and potentially lose revenue in doing so. Moreover, new interpretations of current regulations or future changes in regulations under CLIA may make it difficult or impossible for us to comply with our CLIA classification, which would significantly harm our business.

Many states in which our physician and laboratory clients are located, such as New York, have laws and regulations governing clinical laboratories that are more stringent than federal law and may apply to us even if we are not located, and do not perform our T-SPOT.TB test, in that state. We may also be subject to additional licensing requirements as we expand our sales and operations into new geographic areas, which could impair our ability to pursue our growth strategy.

 

We may potentially be subject to product liability claims.

The testing, manufacturing and marketing of medical diagnostic tests such as our T-SPOT.TB test entail an inherent risk of product liability claims. Further, providing clinical testing services entails a risk of claims for errors or omissions made by our laboratory staff. Potential liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. As of September 30, 2013, we had product liability insurance of $15.1 million. Our existing insurance will have to be increased in the future if we are successful at introducing new diagnostic products and this will increase our costs. Under certain of our customer and license agreements, we have agreed to provide indemnification for product liability claims arising out of the use of our T-SPOT.TB test. In the event that we are held liable for a claim or for damages exceeding the limits of our insurance coverage, we may be required to make substantial payments.

Regardless of merit or eventual outcome, liability claims may result in:

 

 

decreased demand for our product and product candidates;

 

injury to our reputation;

 

costs of related litigation;

 

substantial monetary awards to patients and others;

 

loss of revenue; and

 

the inability to commercialize our products and product candidates.

Any of these outcomes may have an adverse effect on our consolidated results of operations, financial condition and cash flows, and may increase the volatility of our share price.

Our inadvertent or unintentional failure to comply with the complex government regulations concerning privacy of medical records could subject us to fines and adversely affect our reputation.

The U.S. federal privacy regulations limit use or disclosure of protected health information, without written patient authorization, to purposes of payment, treatment or healthcare operations (as defined under the U.S. Health Insurance Portability and Accountability Act, or

 

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HIPAA) except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy regulations provide for significant fines and other penalties for wrongful use or disclosure of protected health information, including potential civil and criminal fines and penalties.

We have policies and practices that we believe make us compliant with the privacy regulations. Nevertheless, the documentation and process requirements of the privacy regulations are complex and subject to interpretation. Failure to comply with the privacy regulations could subject us to sanctions or penalties, loss of business and negative publicity.

The HIPAA privacy regulations establish a “floor” of minimum protection for patients as to their medical information and do not supersede state laws that are more stringent. Therefore, we are required to comply with both HIPAA privacy regulations and various state privacy laws. Although the HIPAA statute and regulations do not expressly provide for a private right of action, we could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply, including the Data Protection Directive established in the European Union. We may also need to comply with varying and possibly conflicting privacy laws and regulations in other jurisdictions. As a result, we could face regulatory actions, including significant fines or penalties, adverse publicity and possible loss of business.

We maintain sensitive data on our computer networks, including certain personal information regarding our customers. We may face threats to our networks from unauthorized access, security breaches and other system disruptions. Despite our security measures, our infrastructure may be vulnerable to attacks by hackers or other disruptive problems. Any such security breach may compromise information stored on our networks and may result in significant data losses or theft of our customers’ personally identifiable information. A cybersecurity breach could hurt our reputation by adversely affecting the perception of customers and potential customers of the security of their orders and personal information. In addition, a cybersecurity attack could result in other negative consequences, including disruption of our internal operations, increased cyber security protection costs, lost revenue, regulatory actions or litigation.

Our use of biological and hazardous materials and wastes requires us to comply with regulatory requirements, including environmental, health and safety laws, regulations and permitting requirements and subjects us to significant costs and exposes us to potential liabilities.

The handling of materials used in the diagnostic testing process involves the controlled use of biological and hazardous materials and wastes. The primary hazardous materials we handle or use include human blood samples and solvents. Our business and facilities and those of our suppliers are subject to federal, state, local and foreign laws and regulations relating to the protection of human health and the environment, including those governing the use, manufacture, storage, handling and disposal of, and exposure to, such materials and wastes. In addition, under some environmental laws and regulations, we could be held responsible for costs relating to any contamination at our past or present facilities and at third-party waste disposal sites even if such contamination was not caused by us. A failure to comply with current or future environmental laws and regulations, including the failure to obtain, maintain or comply with any required permits, could result in severe fines or penalties. Any such expenses or liability could

 

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have a significant negative impact on our business, results of operations and financial condition. In addition, we may be required to incur significant costs to comply with regulatory requirements in the future.

Our relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and ordering of any product candidates, including our T-SPOT.TB test, for which we obtain marketing approval. Our arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product. Restrictions under applicable federal and state healthcare laws and regulations include the following:

 

 

The U.S. federal healthcare anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federally funded healthcare programs such as Medicare and Medicaid. This statute has been broadly interpreted to apply to manufacturer arrangements with prescribers, purchasers and formulary managers, among others. Several other countries, including the United Kingdom, have enacted similar anti-kickback, fraud and abuse, and healthcare laws and regulations.

 

 

The U.S. federal False Claims Act imposes criminal and civil penalties against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government.

 

 

HIPAA imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. HIPAA also imposes criminal liability for knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.

 

 

The federal Physician Payment Sunshine Act requirements under the PPACA (as defined below) require manufacturers of drugs, devices, biologics and medical supplies to report to HHS information related to payments and other transfers of value made to or at the request of covered recipients, such as physicians and teaching hospitals, and physician ownership and investment interests in such manufacturers. Payments made to physicians and research institutions for clinical trials are included within the ambit of this law. Certain state laws and regulations also require the reporting of certain items of value provided to health care professionals.

 

 

Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers.

 

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Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations involve substantial costs. We may be subject to qui tam litigation brought by private individuals on behalf of the government under the U.S. False Claims Act, which would include claims for up to treble damages. Additionally, it is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. Exclusion, suspension and debarment from government funded healthcare programs would significantly impact our ability to commercialize, sell or distribute any product. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

We are subject to the U.K. Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial condition.

Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or Bribery Act, the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We and our commercial partners operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA,

 

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other anti-corruption laws or Trade Control laws by U.K., U.S. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

Healthcare reform measures could hinder or prevent the commercial success of our diagnostic tests.

In March 2010, President Obama signed into law a legislative overhaul of the U.S. healthcare system, known as the Patient Protection and Affordable Care Act of 2010, as amended by the Healthcare and Education Affordability Reconciliation Act of 2010, or the PPACA, which may have far-reaching consequences for most healthcare companies, including diagnostic companies like us. For example, if reimbursement for our diagnostic tests is substantially less than we or our clinical laboratory customers expect, our business could be materially and adversely impacted.

Regardless of the impact of the PPACA on us, the U.S. government and other governments have shown significant interest in pursuing healthcare reform and reducing healthcare costs. Any government-adopted reform measures could cause significant pressure on the pricing of healthcare products and services, including our T-SPOT.TB test, in the United States and internationally, as well as the amount of reimbursement available from governmental agencies and other third-party payors.

Risks related to our intellectual property.

We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize.

In developing, manufacturing and using our T-SPOT.TB test, we employ a variety of proprietary and patented technologies, including technologies we license from third parties. We have licensed, and expect to continue to license, various other technologies and methods. We cannot provide any assurance that the intellectual property rights that we own or license provide protection from competitive threats or that we would prevail in any challenge mounted to our intellectual property rights. In addition, we cannot provide any assurances that we will be successful in obtaining and retaining licenses or proprietary or patented technologies in the future.

We cannot assure investors that any of our currently pending or future patent applications will result in issued patents, and we cannot predict how long it will take for such patents to be issued. Further, we cannot assure investors that other parties will not challenge any patents issued or licensed to us or that courts or administrative agencies will hold our patents or the patents we license to be valid and enforceable. We cannot guarantee investors that we will be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.

The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. Furthermore, in the biotechnology field, courts frequently render opinions that may affect the patentability of certain inventions or discoveries and the patent positions of companies engaged in development and commercialization of certain diagnostic tests. Various

 

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courts, including the U.S. Supreme Court, have recently rendered decisions that impact the scope of patentability of certain inventions or discoveries relating to genomic diagnostics. These decisions generally stand for the proposition that inventions that recite laws of nature are not themselves patentable unless they have sufficient additional features that provide practical assurance that the processes are genuine inventive applications of those laws rather than patent drafting efforts designed to monopolize the law of nature itself. What constitutes a “sufficient” additional feature is uncertain. While we do not generally rely on gene sequence patents, this evolving case law in the United States may adversely impact our ability to obtain new patents and may facilitate third-party challenges to our existing owned and licensed patents.

Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property rights. We cannot predict the breadth of claims that may be allowed or enforced in patents we own or in those to which we have license rights. For example:

 

 

the inventor might not have been the first to make the inventions covered by patents we rely on;

 

 

the inventor or his assignee might not have been the first to file patent applications for the claimed inventions;

 

 

others may independently develop similar or alternative products and technologies or duplicate our product and technologies;

 

 

it is possible that the patents we own or license may not provide us with any competitive advantages, or may be challenged and invalidated by third parties;

 

 

any patents we obtain or license may expire before, or shortly after, the products and services relating to such patents are commercialized;

 

 

we may not develop additional proprietary products and technologies that are patentable; and

 

 

the patents of others may have an adverse effect on our business.

In particular, in September 2011, the U.S. Congress passed the Leahy-Smith America Invents Act, or the AIA, which became effective in March 2013. The AIA reforms U.S. patent law in part by changing the standard for patent approval for certain patents from a “first to invent” standard to a “first to file” standard and developing a post-grant review system. It is too early to determine what the effect or impact the AIA will have on the operation of our business and the protection and enforcement of our intellectual property. However, the AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

Some patent applications in the United States may be maintained in secrecy until the patents are issued, other patent applications in the United States and many foreign jurisdictions are not published until eighteen months after filing, and publications in the scientific literature often lag behind actual discoveries. We therefore cannot be certain that others have not filed patent applications for technology covered by issued patents or pending applications that we own or license or that we or our licensors, as applicable, were the first to invent the technology (pre-AIA) or first to file (post-AIA). Our competitors may have filed, and may in the future file, patent

 

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applications covering technology similar or the same as ours. Any such patent application may have priority over patent applications that we own or license and could further require us to obtain rights to such technologies in order to carry on our business. If another party has filed a U.S. patent application on inventions similar or the same as those that we own or license, we or our licensors may have to participate in an interference or other proceeding in the U.S. Patent and Trademark Office, or PTO, or a court to determine priority of invention in the United States, for pre-AIA applications and patents. For post-AIA applications and patents, we or our licensors may have to participate in a derivation proceeding to resolve disputes relating to inventorship. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our U.S. patent position with respect to such inventions.

Some of our competitors may be able to sustain the costs of complex patent disputes and litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any disputes or litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

In addition to pursuing patents on our technology, we seek to protect our intellectual property and proprietary technology by entering into intellectual property assignment agreements with our employees, consultants and third party collaborators. See “—We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.”

Our intellectual property rights may not be sufficient to protect our competitive position and to prevent others from manufacturing, using or selling competing products.

The scope of our owned and licensed intellectual property rights may not be sufficient to prevent others from manufacturing, using or selling competing tests. For example, our intellectual property position depends in part on intellectual property that we license from third parties. However, many of the key patents we license are expected to expire by 2020. In addition, while many of the licenses we have been granted are exclusive, such rights may be limited to a narrowly defined field of use. As a result, our competitors may have obtained or be able to obtain a license to the same intellectual property in a closely related field of use. Finally, we have also granted sublicenses to third parties under certain of the intellectual property that we license. Such sublicenses may allow third parties or their licensees to market a TB test that would otherwise infringe upon such intellectual property.

Moreover, competitors could purchase our product and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

We depend on certain technologies that are licensed or sublicensed to us. We do not control these technologies and any loss of our rights to them could prevent us from selling our product.

We rely on licenses in order to be able to use various proprietary technologies that are material to our business. For example, we license technology relating to the use of the ELISPOT technique, which forms part of the core platform of our T.SPOT technology, from Isis Innovation Limited, and we license the use of other patents to protect our T-SPOT.TB product from the Statens Serum

 

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Institut and Rutgers, The State University of New Jersey. We expect the patents that we license from Isis Innovation Limited to be assigned to us in connection with this offering. See “Business—Intellectual property—Our license agreements—Isis Innovation Limited (Isis).” Otherwise, we do not own the patents that underlie these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to the continuation of and our compliance with the terms of those licenses.

In some cases, we do not control the prosecution, maintenance or filing of the patents to which we hold licenses. Enforcement of our licensed patents or defense of any claims asserting the invalidity of these patents is often subject to the control or cooperation of our licensors. We cannot be certain that our licensors will prosecute, maintain, enforce and defend the licensed patent rights in a manner consistent with the best interests of our business. We also cannot be certain that drafting or prosecution of the licensed patents and patent applications by the licensors have been or will be conducted in compliance with applicable laws and regulations, will result in valid and enforceable patents and other intellectual property rights, or that any issued patents or patents that may issue in the future will provide any competitive advantage.

Certain of our licenses contain provisions that allow the licensor to terminate the license upon specific conditions. Our rights under each of the licenses are subject to our continued compliance with the terms of the license, including certain diligence, disclosure and confidentiality obligations and the payment of royalties and other fees. If we were found to be in breach of any of our license agreements, in certain circumstances our licensors may take action against us, including termination of the applicable license. Because of the complexity of our product and the patents we have licensed, determining the scope of the license and related obligations can be difficult and can lead to disputes between us and the licensor. An unfavorable resolution of such a dispute could lead to an increase in the royalties payable pursuant to the license or termination of the license. If a licensor believed we were not paying the royalties due under the license or were otherwise not in compliance with the terms of the license, the licensor may have the right to terminate the license or, in certain circumstances, to convert an exclusive license to a non-exclusive one. If such an event were to occur, the value of our product or product candidates could be materially adversely affected, we might be barred from producing and selling some or all of our products and may be subject to other liabilities.

In addition to the above risks, certain of our licensors do not own certain intellectual property included in the license, but instead have licensed such intellectual property from a third party, and have granted us a sub-license. As a result, the actions of our licensors or of the ultimate owners of the intellectual property may affect our rights to use our sublicensed intellectual property, even if we are in compliance with all of the obligations under our license agreements. For example, one of our licenses comprises a sublicense to us of certain patent rights owned by a third party that is not our direct licensor. If our licensors were to fail to comply with their obligations under the agreements pursuant to which they obtain the rights that are sublicensed to us, or should such agreements be terminated or amended, our ability to produce and sell our product and product candidates may be materially harmed. Finally, the legal issues surrounding the treatment of intellectual property licenses in bankruptcy proceedings are complex and may vary from jurisdiction to jurisdiction. We therefore cannot provide assurance that we would not lose some or all of our rights under a license if the applicable licensor was involved in such proceedings.

 

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We may become involved in disputes relating to our intellectual property rights, and may need to resort to litigation in order to defend and enforce our intellectual property rights. In addition, we could face claims that our activities or the manufacture, use or sale of our products infringe the intellectual property rights of others, which could cause us to pay substantial damages or licensing fees and limit our ability to sell some or all of our products and services.

Extensive litigation regarding patents and other intellectual property rights has been common in the medical diagnostics industry. Litigation may be necessary to assert infringement claims, enforce patent rights, protect trade secrets or know-how and determine the enforceability, scope and validity of certain proprietary rights. Litigation may even be necessary to resolve disputes of inventorship or ownership of proprietary rights. The defense and prosecution of intellectual property lawsuits, PTO interference or derivation proceedings, and related legal and administrative proceedings (e.g., a reexamination) in the U.S. and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time consuming to pursue, and their outcome is uncertain.

Even if we prevail in such a proceeding, the remedy we obtain may not be commercially meaningful or adequately compensate us for any damages we may have suffered. If we do not prevail in such a proceeding, our patents could potentially be declared to be invalid, unenforceable or narrowed in scope, or we could otherwise lose valuable intellectual property rights. Similar proceedings involving the intellectual property we license could also have an impact on our business. For example, the scope of one of the European patents that we license from Rutgers, The State University of New Jersey, was recently narrowed as a result of a third party opposition proceeding before the European Patent Office. The decision is currently under appeal and the outcome of that appeal may adversely affect our competitive position. Further, if any of our other owned or licensed patents are declared invalid, unenforceable or narrowed in scope, our competitive position could be adversely affected.

In addition, our research, development and commercialization activities, including our T-SPOT.TB test, may infringe or be claimed to infringe patents or other intellectual property rights owned by other parties. Certain of our competitors and other companies have substantial patent portfolios, and may attempt to use patent litigation as a means to obtain a competitive advantage or to extract licensing revenue. The risks of being involved in such litigation may also increase as we gain greater visibility as a public company and as we gain commercial acceptance of our products and move into new markets and applications for our products. For example, we are aware of an issued U.S. patent owned by a third party which claims technology that may be relevant to our T-SPOT.TB test. We believe this patent is invalid and/or unenforceable, and we therefore challenged the validity of the patent through an ex parte reexamination proceeding before the PTO. Although the validity of the patent was upheld in that proceeding, we continue to believe that the patent is invalid and/or unenforceable based in part on information we discovered after the PTO’s decision in the reexamination proceeding. Nevertheless, if the patent holder were to pursue an infringement claim against us and we were unable to either negotiate acceptable license terms or otherwise resolve the matter, we could incur substantial expense to defend a claim, we could be ordered to pay substantial damages for infringement, and we could be enjoined from future conduct that would infringe the patent, which may include the making, using and selling of our T-SPOT.TB test in the United States. There may also be patents and patent applications that are relevant to our technologies or tests that we are not aware of. For example, certain relevant patent applications may have been filed but not published. If such patents exist, or if a patent issues on any of such patent applications, that patent could be

 

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asserted against us. In addition to patent infringement claims, we may also be subject to other claims relating to the violation of intellectual property rights, such as claims that we have misappropriated trade secrets or infringed third party trademarks.

Regardless of merit or outcome, our involvement in any litigation, interference or other administrative proceedings could cause us to incur substantial expense and could significantly divert the efforts of our technical and management personnel. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our share price to decline. An adverse determination, or any actions we take or agreements we enter into in order to resolve or avoid disputes, may subject us to the loss of our proprietary position or to significant liabilities, or require us to seek licenses that may include substantial cost and ongoing royalties. Licenses may not be available from third parties, or may not be obtainable on satisfactory terms. An adverse determination or a failure to obtain necessary licenses may restrict or prevent us from manufacturing and selling our products and offering our services. These outcomes could materially harm our business, financial condition and results of operations.

We may not be able to adequately protect our intellectual property outside of the United States.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our licensed and owned patents. For example, we are aware that third parties, particularly in China, are currently selling TB diagnostic products that we believe are covered by certain patents we license. We do not know whether our licensor will take the necessary steps to enforce its patent rights in China or whether it is likely to be successful in any such action. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business. Additionally, prosecuting and maintaining intellectual property (particularly patent) rights are very costly endeavors, and for these and other reasons we may not pursue or obtain patent protection in all major markets. We do not know whether legal and government fees will increase substantially and therefore are unable to predict whether cost may factor into our global intellectual property strategy.

In addition to the risks associated with patent rights, the laws in some foreign jurisdictions may not provide protection for our trade secrets and other intellectual property. If our trade secrets or other intellectual property are misappropriated in foreign jurisdictions, we may be without adequate remedies to address these issues. Additionally, we also rely on confidentiality and assignment of invention agreements to protect our intellectual property in foreign jurisdictions. These agreements may provide for contractual remedies in the event of misappropriation, but we do not know to what extent, if any, these agreements and any remedies for their breach, will be enforced by a foreign court. In the event our intellectual property is misappropriated or infringed upon and an adequate remedy is not available, our future prospects will likely diminish. The sale of products that infringe our intellectual property rights, particularly if such products are offered at a lower cost, could negatively impact our ability to achieve commercial success and may materially and adversely harm our business.

 

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Our failure to secure trademark registrations could adversely affect our business and our ability to market our product and product candidates.

Our trademark applications in the United States and any other jurisdictions where we may file may not be allowed for registration, and our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the PTO and in corresponding foreign agencies, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our applications and/or registrations, and our applications and/or registrations may not survive such proceedings. Failure to secure such trademark registrations in the United States and in foreign jurisdictions could adversely affect our business and our ability to market our product and product candidates.

Obtaining and maintaining our patent protection depends upon compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent prosecution process and following the issuance of a patent. There are situations in which noncompliance with these requirements 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. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case if our patent were in force.

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information, or the misappropriation of the intellectual property we regard as our own.

We rely on trade secrets to protect our proprietary know-how and technological advances, particularly where we do not believe patent protection is appropriate or obtainable. Nevertheless, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, third party collaborators and other advisors to protect our trade secrets and other proprietary information. These agreements generally require that the other party to the agreement keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to seek to pursue a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. Further, courts outside the United States may be less willing to protect trade secrets. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. In addition, our trade secrets and proprietary information may be misappropriated as a result of breaches of our electronic or physical security systems in which case we may have no legal recourse. Failure to obtain, or maintain, trade secret protection could enable competitors to use our proprietary information to develop products that compete with our product or cause additional, material adverse effects upon our competitive business position.

 

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We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the medical diagnostics industry, we employ individuals who were previously employed at other medical diagnostics companies, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Risks related to our ordinary shares and this offering.

We are eligible to be treated as an emerging growth company and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our ordinary shares less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (3) 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, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this prospectus. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares held by non-affiliates exceeds $700.0 million as of any June 30 in any fiscal year before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There is no established trading market for our ordinary shares.

This offering constitutes our initial public offering of our ordinary shares, and no public market for our ordinary shares currently exists. Our ordinary shares will be listed and quoted on The NASDAQ Global Market. There can be no assurance that an active trading market for our ordinary shares will develop or be sustained after this offering is completed. The initial offering

 

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price has been determined by negotiations among the lead underwriters and us. Among the factors considered in determining the initial offering price were our future prospects and the prospects of our industry in general, our revenue, net income and certain other financial and operating information in recent periods, and the financial ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. Nevertheless, there can be no assurance that following this offering our ordinary shares will trade at a price equal to or greater than the offering price.

Our share price may be volatile.

In addition, like other early-stage medical diagnostic companies, the market price of our ordinary shares may be volatile. The factors below may also have a material adverse effect on the market price of our ordinary shares:

 

 

fluctuations in our results of operations;

 

 

our ability to enter new markets;

 

 

negative publicity;

 

 

changes in securities or industry analyst recommendations regarding our company, the sectors in which we operate, the securities market generally and conditions in the financial markets;

 

 

regulatory developments affecting our industry;

 

 

announcements of studies and reports relating to our products or those of our competitors;

 

 

changes in economic performance or market valuations of our competitors;

 

 

actual or anticipated fluctuations in our quarterly results;

 

 

conditions in the industries in which we operate;

 

 

announcements by us or our competitors of new products, acquisitions, strategic relations, joint ventures or capital commitments;

 

 

additions to or departures of our key executives and employees;

 

 

fluctuations of exchange rates;

 

 

release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares; and

 

 

sales or perceived sales of additional shares of our ordinary shares.

In addition, the equity markets have recently experienced significant volatility, particularly with respect to the securities of life sciences companies. The volatility of the securities of life sciences companies often does not relate to the operating performance of those companies. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

 

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If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our ordinary shares will depend on the research and reports that securities or industry analysts publish about us or our business. Currently, we do not have any analyst coverage and we may not obtain analyst coverage in the future. In the event we obtain analyst coverage, we will not have any control over such analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Substantial future sales of our ordinary shares in the public market, or the perception that these sales could occur, could cause the price of our ordinary shares to decline.

Additional sales of our ordinary shares in the public market after this initial public offering, or the perception that these sales could occur, could cause the market price of our ordinary shares to decline. Upon completion of this offering, we will have 16,362,733 ordinary shares outstanding, assuming no exercise of the underwriters’ overallotment option. All ordinary shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. A limited number of ordinary shares may be available for sale shortly after this offering since they are not subject to existing contractual and legal restrictions on resale. The remaining ordinary shares outstanding after this offering will be available for sale upon the expiration of a lock-up period, which we expect will expire 180 days after the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act, or Rule 144. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriters for this offering. To the extent any of these shares are sold into the market, particularly in substantial quantities, the market price of our ordinary shares could decline. See “Shares eligible for future sale.”

We do not intend to pay cash dividends on our ordinary shares in the foreseeable future.

We have never paid dividends on ordinary shares and do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future. Under English law, any payment of dividends would be subject to relevant legislation and our articles of association, which provide that all dividends must be approved by our Board of Directors and, in some cases, our shareholders, and may only be paid from our distributable profits available for the purpose, determined on an unconsolidated basis.

Our institutional investors and management own a significant percentage of our ordinary shares and will be able to exercise significant influence over matters subject to shareholder approval.

As of September 30, 2013, our executive officers, directors and each of the investment funds identified in the section under the heading “Principal shareholders,” whom we refer to as our institutional investors, together with their respective affiliates, beneficially owned approximately 83% of our outstanding ordinary shares, and we expect that upon completion of this offering, that same group will continue to beneficially own at least 55% of our outstanding ordinary shares. Accordingly, even after this offering, these shareholders will be able to exert a significant degree of influence over our management and affairs and over matters requiring shareholder approval, including the election of our Board of Directors and approval of significant corporate

 

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transactions. This concentration of ownership could have the effect of entrenching our management and/or our Board of Directors, delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the fair market value of our ordinary shares.

Management will have broad discretion as to the use of the proceeds from this offering, and we may not use the proceeds effectively.

Our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those currently contemplated. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our profitability or our market value. See “Use of proceeds” for a description of our management’s intended use of the proceeds from this offering.

You will incur immediate and substantial dilution as a result of this offering.

If you purchase ordinary shares in this offering, assuming a public offering price of $14.00, the midpoint of the range set forth on the cover of this prospectus, you will incur immediate and substantial dilution of $9.04 per share, representing the difference between the assumed initial public offering price of $14.00 per share and our pro forma net tangible book value per share after giving effect to this offering. Moreover, we have previously issued warrants and options to acquire ordinary shares at prices significantly below the assumed initial public offering price. As of September 30, 2013, there were 19,473 shares subject to outstanding warrants and 1,306,246 shares subject to outstanding options. To the extent that these outstanding warrants or options are ultimately exercised, you will incur further dilution.

We will incur increased costs as a result of being a public company whose ordinary shares are publicly traded in the United States and our management expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures, retain a transfer agent, adopt an insider trading policy and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In connection with this offering, we are increasing our directors’ and officers’ insurance coverage, which will increase our insurance costs. In the future, it will be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee and remuneration committee, and qualified executive officers.

 

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In addition, in order 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 Securities and Exchange Commission, or the SEC, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations. 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 The NASDAQ Global Market.

We are not currently required to comply with the SEC’s 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 implementing 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.

Our independent registered public accounting firm will not be required to attest formally 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. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.

Our ordinary shares will be listed on The NASDAQ Global Market, but we cannot guarantee that we will be able to satisfy the continued listing standards going forward.

Although our ordinary shares will be initially listed on The NASDAQ Global Market, we cannot ensure that we will be able to satisfy the continued listing standards of The NASDAQ Global Market going forward. If we cannot satisfy the continued listing standards going forward, The NASDAQ Stock Market may commence delisting procedures against us, which could result in our ordinary shares being removed from listing on The NASDAQ Global Market. If our ordinary shares were to be delisted, the liquidity of our ordinary shares could be adversely affected and the market price of our ordinary shares could decrease. Delisting could also adversely affect our shareholders’ ability to trade or obtain quotations on our shares because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask price for our ordinary shares. You may also not be able to resell your shares at or above the price you paid for such shares or at all.

 

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English law and provisions in our articles of association may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders, and may prevent attempts by our shareholders to replace or remove our current management.

Certain provisions of English law and our articles of association may have the effect of delaying or preventing a change in control of us or changes in our management. For example, English law and our articles of association include provisions that:

 

 

create a classified Board of Directors whose members serve staggered three-year terms;

 

 

prohibit shareholder action by written resolution;

 

 

establish an advance notice procedure for shareholder approvals to be brought before an annual meeting of our shareholders, including proposed nominations of persons for election to our Board of Directors; and

 

 

provide that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. See also “—Provisions in the U.K. City Code on Takeovers and Mergers may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders.”

Our holding company structure makes us dependent on the operations of our subsidiaries to meet our financial obligations.

We are a public limited company organized under the laws of England and Wales and have no significant assets other than our interest in Oxford Immunotec Limited. As a result, we rely exclusively upon payments, dividends and distributions from our direct and indirect subsidiaries for our cash flows. Our ability to pay dividends to our shareholders is dependent on the ability of our subsidiaries to generate sufficient net income and cash flows to pay upstream dividends and make loans or loan repayments.

Risks related to being an English company listing ordinary shares.

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation organized in Delaware.

We are incorporated under English law. The rights of holders of our ordinary shares are governed by English law, including the provisions of the Companies Act 2006, and by our articles of association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations organized in Delaware. The principal differences are set forth in “Description of our share capital—Differences in corporate law.”

U.S. investors may have difficulty enforcing civil liabilities against our company, our directors or members of senior management and the experts named in this prospectus.

We are incorporated under the laws of England and Wales. Many of our directors and officers reside outside the United States, and a substantial portion of our assets and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may be difficult for you to serve legal process on us or our directors and executive officers or have any of

 

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them appear in a U.S. court. The United States and the United Kingdom do not currently have a treaty providing for the recognition and enforcement of judgments, other than arbitration awards, in civil and commercial matters. The enforceability of any judgment of a U.S. federal or state court in the United Kingdom will depend on the laws and any treaties in effect at the time, including conflicts of laws principles (such as those bearing on the question of whether a U.K. court would recognize the basis on which a U.S. court had purported to exercise jurisdiction over a defendant). In this context, there is doubt as to the enforceability in the United Kingdom of civil liabilities based solely on the federal securities laws of the United States. In addition, awards for punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. An award for monetary damages under the U.S. securities laws would likely be considered punitive if it did not seek to compensate the claimant for loss or damage suffered and was intended to punish the defendant.

Provisions in the U.K. City Code on Takeovers and Mergers may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders.

The U.K. City Code on Takeovers and Mergers, or the Takeover Code, applies, among other things, to an offer for a public company whose registered office is in the United Kingdom (or the Channel Islands or the Isle of Man) and whose securities are not admitted to trading on a regulated market in the United Kingdom (or the Channel Islands or the Isle of Man) if the company is considered by the Panel on Takeovers and Mergers, or the Takeover Panel, to have its place of central management and control in the United Kingdom (or the Channel Islands or the Isle of Man). This is known as the “residency test.” The test for central management and control under the Takeover Code is different from that used by the U.K. tax authorities. Under the Takeover Code, the Takeover Panel will determine whether we have our place of central management and control in the United Kingdom by looking at various factors, including the structure of our Board of Directors, the functions of the directors and where they are resident.

If at the time of a takeover offer the Takeover Panel determines that we have our place of central management and control in the United Kingdom, we would be subject to a number of rules and restrictions, including but not limited to the following: (1) our ability to enter into deal protection arrangements with a bidder would be extremely limited; (2) we might not, without the approval of our shareholders, be able to perform certain actions that could have the effect of frustrating an offer, such as issuing shares or carrying out acquisitions or disposals; and (3) we would be obliged to provide equality of information to all bona fide competing bidders.

If we are a passive foreign investment company, U.S. investors in our ordinary shares could be subject to adverse U.S. federal income tax consequences.

The rules governing passive foreign investment companies, or PFICs, can have adverse effects for U.S. federal income tax purposes. The tests for determining PFIC status for a taxable year depend upon the relative values of certain categories of assets and the relative amounts of certain kinds of income. As discussed in “—Material tax considerations—Material U.S. federal income tax considerations,” we do not believe that we are currently a PFIC, and we do not anticipate becoming a PFIC in the foreseeable future. Notwithstanding the foregoing, the determination of whether we are a PFIC depends on the particular facts and circumstances (such as the valuation of our assets, including goodwill and other intangible assets) and may also be affected by the application of the PFIC rules, which are subject to differing interpretations. The fair market value

 

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of our assets is expected to depend, in part, upon (a) the market price of our ordinary shares and (b) the composition of our income and assets, which will be affected by how, and how quickly, we spend any cash that is raised in any financing transaction, including this offering. In light of the foregoing, no assurance can be provided that we are not currently a PFIC or that we will not become a PFIC in any future taxable year.

If we are a PFIC, U.S. holders of our ordinary shares would be subject to adverse U.S. federal income tax consequences, such as ineligibility for any preferred tax rates on capital gains or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws and regulations. Whether or not U.S. holders of our ordinary shares make a timely qualified electing fund, or QEF, election or mark-to-market election may affect the U.S. federal income tax consequences to U.S. holders with respect to the acquisition, ownership and disposition of our ordinary shares and any distributions such U.S. holders may receive. Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our ordinary shares.

U.S. holders of 10% or more of the voting power of our ordinary shares may be subject to U.S. federal income taxation at ordinary income tax rates on undistributed earnings and profits.

There is a risk that we will be classified as a controlled foreign corporation, or CFC, for U.S. federal income tax purposes. We will generally be classified as a CFC if more than 50% of our outstanding shares, measured by reference to voting power or value, are owned (directly, indirectly or by attribution) by “U.S. Shareholders.” For this purpose, a “U.S. Shareholder” is any U.S. person that owns directly, indirectly or by attribution, 10% or more of the voting power of our outstanding shares. If we are classified as a CFC, a U.S. Shareholder may be subject to U.S. income taxation at ordinary income tax rates on all or a portion of our undistributed earnings and profits attributable to “subpart F income” and may also be subject to tax at ordinary income tax rates on any gain realized on a sale of ordinary shares, to the extent of our current and accumulated earnings and profits attributable to such shares. The CFC rules are complex and U.S. Shareholders of the ordinary shares are urged to consult their own tax advisors regarding the possible application of the CFC rules to them in their particular circumstances.

 

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Cautionary note regarding forward-looking statements

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “strategy, “objective,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include those identified under the heading “Risk factors.”

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

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Use of proceeds

We estimate that the net proceeds of the sale of 5,360,000 ordinary shares in this offering will be approximately $63.8 million at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus, 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 the net proceeds will be approximately $74.3 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease our net proceeds by $5.0 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds of this offering as follows:

 

 

approximately $25.0 million to hire additional sales, marketing and customer service personnel and expand marketing programs both in the United States and outside the United States;

 

 

approximately $11.0 million to fund research and development programs dedicated to development of new diagnostic tests in the field of immunology;

 

 

approximately $6.0 million to repay indebtedness outstanding under our senior secured term debt facility and related accrued interest; and

 

 

approximately $21.8 million for working capital and other general corporate purposes.

As of September 30, 2013, we had $6.0 million outstanding under our senior secured term debt. This indebtedness matures in May 2017 and bears an interest rate equal to the greater of 2.75% above the prime rate or 6.0%. The use of proceeds of such indebtedness was to repay prior indebtedness and for working capital.

We may also use a portion of the net proceeds to opportunistically acquire, license and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction.

We cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. In addition, the amount, allocation and timing of our actual expenditures will depend upon numerous factors, including the revenue generated from the sale of our products and our ability to satisfy ourselves that each investment is likely to have a good return. Accordingly, we will have broad discretion in using these proceeds. Pending their uses, we plan to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade instruments or other securities.

 

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Dividend policy

We have never declared or paid cash dividends on our ordinary shares. 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 as to the declaration and payment of dividends, if any, will be made at the discretion of our Board of Directors and will depend on then existing conditions, including our results of operations, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our Board of Directors may deem relevant. Under English law, we may pay dividends only out of our accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less our accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries, including Oxford Immunotec Limited.

 

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Capitalization

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

 

 

on an actual basis;

 

 

on a pro forma basis to reflect (1) the Scheme of Arrangement completed on October 2, 2013, (2) the 1-for-6.705 reverse share split of our ordinary shares effected on November 7, 2013, (3) the conversion of all outstanding preferred ordinary shares and A ordinary shares (4) the repayment of indebtedness outstanding under our senior secured debt and (5) our issuance and sale of 5,360,000 ordinary shares at an assumed initial public offering price of $14.00 per share, the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us as if they had occurred on September 30, 2013;

You should read this information together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the heading “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations.”

 

    As of September 30, 2013  
(in thousands, except share and per share data)   Actual     Pro forma  

Cash and cash equivalents(1)

  $ 13,035      $ 72,554   
 

 

 

   

 

 

 

Interest-bearing loans and borrowings, short-term

    667        —     

Interest-bearing loans and borrowings, long-term

    5,333        —     
 

 

 

   

 

 

 
    6,000        —     

A preferred ordinary shares, £0.006705 par value; 134,708 shares authorized, 134,706 shares issued and outstanding at December 31, 2012 and September 30, 2013.

                      2        —     

B preferred ordinary shares, £0.006705 par value; 53,992 shares authorized, 53,992 shares issued and outstanding at December 31, 2012 and September 30, 2013.

    1        —     

D preferred ordinary shares, £0.006705 par value; 520,275 shares authorized, 487,222 shares issued and outstanding at December 31, 2012 and September 30, 2013.

    5        —     

E preferred ordinary shares, £0.006705 par value; 4,772,557 shares authorized, 2,547,496 shares issued and outstanding at December 31, 2012 and September 30, 2013.

    33        —     

F preferred ordinary shares, £0.006705 par value; 2,982,848 shares authorized, 2,574,575 shares issued and outstanding at December 31, 2012 and September 30, 2013.

    26        —     

G preferred ordinary shares, £0.006705 par value; 3,728,560 shares authorized, 1,503,330 and 2,469,748 shares issued and outstanding at December 31, 2012 and September 30, 2013 respectively.

    27        —     

Ordinary shares, £0.006705 par value; 16,432,475 shares authorized, 2,153,974 and 2,338,087 shares issued and outstanding at December 31, 2012 and September 30, 2013, respectively.

    25        155   

Additional paid-in capital

    114,480        179,433   

Accumulated deficit

    (96,327     (96,327

Accumulated other comprehensive loss

    (4,069     (4,069
 

 

 

   

 

 

 

Total shareholders’ equity

    14,203        79,192   
 

 

 

   

 

 

 

Total capitalization

  $ 20,203      $ 79,192   
 

 

 

   

 

 

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) our actual cash and cash equivalents by $5.0 million, after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

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The table above does not include:

 

 

1,306,147 ordinary shares issuable upon exercise of options outstanding as of November 7, 2013 at a weighted-average exercise price of $0.48 per share;

 

 

19,473 ordinary shares issuable upon the exercise of warrants outstanding as of November 7, 2013 at a weighted-average exercise price of $0.67 per share; and

 

 

2,684,563 ordinary shares reserved for future issuance under our equity incentive plans as of November 7, 2013.

 

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Dilution

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

As of September 30, 2013, we had a historical net tangible book value of $14.0 million, or $1.33 per ordinary share, taking into account the expected conversion of our outstanding preferred ordinary shares and our outstanding A ordinary shares into ordinary shares prior to the completion of this offering. Without giving effect to the conversion of our outstanding preferred ordinary shares and A ordinary shares into ordinary shares, we had a historical net tangible book value of $14.0 million, or $6.07 per ordinary share, as of September 30, 2013. Historical net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the number of outstanding ordinary shares.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to (1) the conversion of all of our preferred ordinary shares and A ordinary shares into 8,279,633 ordinary shares prior to the completion of this offering and (2) the sale of 5,360,000 ordinary shares in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus, our pro forma as adjusted net tangible book value as of September 30, 2013 would have been $79.1 million, or $4.96 per ordinary share. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.62 per share to our existing shareholders and an immediate dilution of $9.04 per share to investors participating in this offering. The following table illustrates this per share dilution:

 

     

Assumed initial public offering price per share

     $ 14.00  

Historical net tangible book value per share as of September 30, 2013

   $ 6.07    

Effect on net tangible book value per share attributable to conversion of preferred ordinary shares and A ordinary shares at September 30, 2013

     (4.74  

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

     1.33     

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

     3.63     

Pro forma net tangible book value per share after this offering

       4.96   

Dilution per share to new investors

     $ 9.04  

 

 

If the underwriters exercise their overallotment option in full, the pro forma as adjusted net tangible book value would be $5.34 per share, representing an immediate dilution of $8.39 per share to new investors, based on the assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share would increase or decrease our pro forma as adjusted net tangible book value by $5.0 million, the pro forma as adjusted net tangible book value per share by $0.69 per share and the dilution to investors purchasing shares in this offering by $0.31 per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes, on a pro forma as adjusted basis as of September 30, 2013, the differences between the number of ordinary shares purchased from us, the total consideration and the average price per share paid by existing shareholders (giving effect to the conversion of all of our preferred ordinary shares and A ordinary shares into 8,279,633 ordinary shares 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 payable by us, at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover of this prospectus.

 

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

 

 

Existing shareholders

     10,605,908         66%       $ 113,135,107        64%       $ 10.67  

New investors

     5,360,000         34%         63,826,563         36%         11.91   
  

 

 

    

Total

     15,965,908         100%       $ 176,961,670         100%      

 

 

The number of ordinary shares to be outstanding after this offering is based on 10,605,908 ordinary shares outstanding as of November 7, 2013 and excludes the following:

 

 

1,306,147 ordinary shares issuable upon exercise of options outstanding as of November 7, 2013 at a weighted-average exercise price of $0.48 per share;

 

 

19,473 ordinary shares issuable upon the exercise of warrants outstanding as of November 7, 2013 at a weighted-average exercise price of $0.67 per share; and

 

 

2,684,563 ordinary shares reserved for future issuance under our equity incentive plans as of November 7, 2013.

To the extent that new options are issued under our equity incentive plans or we issue additional ordinary shares in the future, there will be further dilution to investors participating in this offering. See “Risk factors—You will incur immediate and substantial dilution as a result of this offering.”

 

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Selected consolidated financial data

The following tables summarize our consolidated financial and other data. The consolidated statement of operations data for the years ended December 31, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2012 and 2013 and the consolidated balance sheet data as of September 30, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2008, 2009 and 2010 from our unaudited consolidated financial statements not included in this prospectus.

On October 2, 2013, we completed the Scheme of Arrangement. Prior to the Scheme of Arrangement, our business was conducted by Oxford Immunotec Limited and its consolidated subsidiaries. Following the Scheme of Arrangement, our business has been conducted by Oxford Immunotec Global PLC and its consolidated subsidiaries, including Oxford Immunotec Limited.

We have prepared the unaudited consolidated financial information presented below on the same basis as our audited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future and our results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. You should read the following selected financial data together with “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and accompanying notes included elsewhere in this prospectus. The selected financial data in this section are not intended to replace our financial statements and the accompanying notes.

 

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     Year ended December 31,    

Nine months
ended September 30,

 
(in thousands, except
share and per share
data) (unaudited)
  2008     2009     2010     2011     2012     2012     2013  

 

 

Consolidated statement of operations data:

             

Revenue

  $ 3,706      $ 4,308      $ 7,741      $ 12,641      $ 20,685      $ 15,406      $ 28,559   

Cost of revenue

    2,179        2,310        4,871        8,417        12,424        9,123        14,165   
 

 

 

 

Gross profit

    1,527        1,998        2,870        4,224        8,261        6,283        14,394   

Operating expenses:

             

Research and development

    4,142        2,596        1,938        1,780        1,947        1,232        1,583   

Sales and marketing

    7,646        6,507        9,375        10,536        11,177        7,895        9,557   

General and administrative

    4,254        5,679        5,050        5,232        8,068        5,784        8,457   
 

 

 

 

Total operating costs

    16,042        14,782        16,363        17,548        21,192        14,911        19,597   
 

 

 

 

Loss from operations

    (14,515     (12,784     (13,493     (13,324     (12,931     (8,628     (5,203

Other (expense) income

    2,946        (565     1,500        101        (2,103     (1,944     (98
 

 

 

 

Loss before income taxes

    (11,569     (13,349     (11,993     (13,223     (15,034     (10,572     (5,301

Income tax provision (benefit)

    (365     (256     (147     (119     (151     21        35   
 

 

 

 

Net loss

  $ (11,204   $ (13,093   $ (11,846   $ (13,104   $ (14,883   $ (10,593   $ (5,336
 

 

 

 

Net loss per share attributable to ordinary shareholders, basic and diluted

  $ (9.18   $ (6.71   $ (2.20   $ (1.61   $ (1.26   $ (1.02   $ (0.35
 

 

 

 

Weighted-average shares used to compute net loss attributable to ordinary shareholders, basic and diluted

    1,220,145        1,951,633        5,381,173        8,150,146        11,825,803        10,338,893        15,129,791   
 

 

 

 

Pro forma (loss) per share, basic and diluted(1)

          $ (1.79     $ (0.49
         

 

 

     

 

 

 

Pro forma weighted-average number of shares, basic and diluted

            8,336,899          10,727,827   
         

 

 

     

 

 

 

Supplemental financial metric:

             

Adjusted EBITDA(2)

  $ (8,904   $ (12,083   $ (11,019   $ (12,519   $ (12,131   $ (8,057   $ (4,296

 

 

 

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     As of December 31,     As of September 30, 2013  
    2008     2009     2010     2011     2012     Actual     Pro forma(1)  

 

 

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

  $     15,197      $ 9,056      $ 6,644      $ 2,334      $ 12,578      $ 13,035      $ 72,554   

Total assets

    18,444            13,527            11,547              9,639            25,483        31,538        89,166   

Total liabilities

    2,449        2,796        3,371        4,413        8,534        17,335        9,974   

Total shareholders’ equity

    15,995        10,731        8,176        5,226        16,949        14,203        79,192   

Shares outstanding:

             

Preferred ordinary shares

    21,613,139        25,928,795        31,477,499        37,642,730        48,955,690        55,435,513          

Ordinary shares

    1,374,212        2,817,847        6,406,358        8,492,175        14,442,575        15,677,098        15,965,908   

 

 

 

(1)   The pro forma data gives effect to the Scheme of Arrangement, which was completed on October 2, 2013, the 1-for-6.705 reverse share split of our ordinary shares effected on November 7, 2013, the conversion of all outstanding preferred ordinary shares and A ordinary shares into an aggregate of 8,279,633 ordinary shares in connection with this offering, the repayment of indebtedness outstanding under our senior secured term debt and our issuance and sale of 5,360,000 ordinary shares at an assumed initial public offering price of $14.00 per share, the midpoint of the price range listed on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)   Adjusted EBITDA is a non-GAAP financial measure that we calculate as profit (loss), adjusted for tax benefit and impairment (expense), unrealized exchange fluctuations, interest expense, interest income, depreciation and amortization and share-based compensation. We believe that Adjusted EBITDA provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and Board of Directors. Our presentation of Adjusted EBITDA is not made in accordance with U.S. GAAP, and our computation of Adjusted EBITDA may vary from others in the industry. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For example, Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations.

The following table presents a reconciliation of net income (loss), the most comparable U.S. GAAP financial measure, to Adjusted EBITDA for each of the periods indicated:

 

      Year ended December 31,      Nine months
ended September 30,
 
(in thousands)    2008     2009     2010     2011     2012      2012     2013  

 

 

Reconciliation of (loss) profit to Adjusted EBITDA

               

Net loss

   $ (11,204   $ (13,093   $ (11,846   $ (13,104   $ (14,883    $ (10,593   $ (5,336
  

 

 

 

Income tax provision (benefit)

     (365     (256     (147     (119     (151      21        35   

Interest income

     (211     (8     (5     (1     (1               

Interest expense

     263        40        23        4        1,478         1,452        256   

Depreciation and amortization

     535        569        586        630        801         580        863   
  

 

 

 

EBITDA

     (10,982     (12,748     (11,389     (12,590     (12,576      (8,540     (4,182
  

 

 

 

Reconciling items:

               

Share-based compensation expense

     278        171        261        125        79         59        77   

Unrealized exchange gains (losses)

     1,800        494        109        (54     546         424        (191
  

 

 

 

Adjusted EBITDA

   $ (8,904   $ (12,083   $ (11,019   $ (12,519   $ (12,131    $ (8,057   $ (4,296

 

 

 

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Management’s discussion and analysis of

financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included later in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk factors.”

Overview

We are a global, commercial-stage diagnostics company committed to improving patient care by providing advanced, innovative tests in the field of immunology. Our proprietary T-SPOT technology platform allows us to measure the responses of specific immune cells, known as T cells, to inform the diagnosis, prognosis and monitoring of patients with immunologically controlled diseases. T cells are a central component of the human body’s immune system, and are implicated in the control and progression of many medical conditions, including certain types of infectious diseases, cancers and autoimmune diseases.

The initial product we have developed using our T-SPOT technology platform is our T-SPOT.TB test, which is used to test for LTBI. Our T-SPOT.TB test has been approved for sale in over 50 countries, including the United States, where we have received PMA from the FDA, in Europe, where we have obtained a CE mark, as well as Japan and China. Our T-SPOT.TB test has been included in clinical guidelines for TB screening in 17 countries. In addition, we have established reimbursement for our test in the United States, as well as a CPT® code2 that is used only for our test. We believe that many payors rely upon CPT codes to determine the amount they pay providers. Outside the United States, we have established reimbursement in several countries where reimbursement applies, including Japan, Switzerland and Germany. Our customers benefit from the existence of reimbursement mechanisms as it provides more certainty of the amount they will be paid for performing our test, as described in the section under the heading “Business—Funding and reimbursement.” We believe the annual global market opportunity for our T-SPOT.TB test is well in excess of $1 billion, assuming we can largely displace the TST in the developed world.

We are a global business with 151 employees, including sales and marketing teams, on three continents, and laboratories in the United States and the United Kingdom. We sell to customers in over 40 countries and derived 50% of our revenue from outside the United States for the year ended December 31, 2012. Our current customer base is comprised of over 1,000 active customers, consisting of hospitals, public health departments, commercial testing laboratories, importers and distributors.

We have incurred significant losses from inception and as of September 30, 2013 had an accumulated deficit of $96.3 million. We anticipate that our operating losses will continue for the next few years as we continue to invest to grow our customer base. Our revenue for the year ended December 31, 2011 was $12.6 million, for the year ended December 31, 2012 was $20.7 million, and for the nine months ended September 30, 2013 was $28.6 million. Our net loss for the year ended December 31, 2011 was $13.1 million, for the year ended December 31, 2012 was $14.9 million and for the nine months ended September 30, 2013 was $5.3 million.

 

2   

CPT is a registered trademark of the American Medical Association.

 

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On October 2, 2013, pursuant to the Scheme of Arrangement, the holders of equity interests in Oxford Immunotec Limited, including holders of ordinary shares, preferred ordinary shares, options and warrants, exchanged their interests in Oxford Immunotec Limited for identical interests in Oxford Immunotec Global PLC, which became the parent company of Oxford Immunotec Limited.

Financial operations overview

Revenue

We generate revenue from sales associated with our T-SPOT technology platform via our direct sales force and also through distributors. Our T-SPOT.TB test is our first commercialized product based on this platform. For a description of our revenue recognition policies, see “—Critical accounting policies and significant judgments and estimates—Revenue recognition and accounts receivable.”

Revenue mix

We currently offer our T-SPOT.TB test in either an in vitro diagnostic kit or a service format. In the former, we sell test kits and associated accessories to distributors for resale and directly to institutions and laboratories that perform TB testing. In the latter, we have established clinical testing laboratories in the United States and the United Kingdom, where we perform our T-SPOT.TB test on samples sent to us by customers. In these markets, we have found that many customers prefer to send samples to us rather than perform their own analysis on-site.

Our U.S. business derived 94%, 95% and 96% of revenue from our service offering for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, respectively, which reflects our experience that U.S. customers prefer to send IGRA tests out for processing and analysis rather than run them in-house. For the majority of our U.S. customers in the hospital and public health segments, TB testing programs are funded primarily from institutional budgets. We receive payment from these customers according to our pre-negotiated prices. For other segments of the U.S. market (notably, for example, the physicians’ office segment) third-party reimbursement is often available to cover the cost of our T-SPOT.TB test.

Outside the United States, we derived 84%, 83% and 89% of our revenue from the sale of our in vitro diagnostic kits and associated accessories for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, respectively. For the majority of our customers outside the United States, we primarily negotiate pricing directly with our customers, and our prices are influenced to some degree by the mechanism and level of funding our customers receive for performing testing.

 

                                    
    

        Year ended December 31,

      

        Nine months ended September 30,

 
(in thousands)    2011      2012        2012      2013(1)  

 

 

Revenue

             

Product

   $ 6,281       $ 9,080         $ 6,807       $ 14,888   

Service

     6,360         11,605           8,599         13,671   
  

 

 

 

Total revenue

   $ 12,641       $ 20,685         $ 15,406       $ 28,559   

 

 

 

(1)   This revenue mix is not necessarily indicative of year-end results due to seasonality and ordering patterns.

 

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Revenue by geography

We sell our T-SPOT.TB test through our own sales force in the United States, certain European countries and Japan. We sell through distributors in other parts of the world. In the future, we intend to expand our sales force globally and establish additional distributor relationships outside of our direct markets to better access international markets.

The following table reflects product revenue by geography (United States, Europe & ROW and Asia) and as a percentage of total product revenue, based on the billing address of our customers.

 

                                                          
    Year ended December 31,     Nine months
ended September  30,
 
(in thousands, except percentages)   2011     2012     2012     2013  

 

 

Revenue

               

United States

  $ 5,604        44   $ 10,366        50   $ 7,826        51   $ 12,597        44

Europe & ROW

    5,587        44     6,530        32   $ 4,724        31     5,110        18

Asia

    1,450        12     3,789        18   $ 2,856        19     10,852        38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 12,641        100   $ 20,685        100   $ 15,406        100   $ 28,559        100

 

 

Our revenue is denominated in multiple currencies. Sales in the United States and China are denominated in U.S. Dollars. Sales in Europe & ROW are denominated primarily in the Pound Sterling and the Euro. Sales in Japan are denominated in Yen. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, the United Kingdom and Japan. We operate globally and therefore changes in foreign currency exchange rates may become material to us in the future due to factors beyond our control. See “—Quantitative and qualitative disclosure about market risk—Foreign currency exchange risk.”

Cost of revenue and operating expenses

Cost of revenue and gross margin

Cost of revenue consists of direct labor expenses, including employee benefits and share-based compensation expenses, overhead expenses, material costs, cost of laboratory supplies, freight costs, royalties paid under license agreements, U.S. medical device excise tax and depreciation of laboratory equipment and leasehold improvements. During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, our cost of revenue represented 67%, 60% and 50%, respectively, of our total revenue.

 

                                    
    

        Year ended December 31,

      

        Nine months ended September 30

 
(in thousands)    2011      2012        2012      2013  

 

 

Cost of Revenue

             

Product

   $ 2,955       $ 4,329           3,116         6,767   

Service

     5,462         8,095           6,007         7,398   
  

 

 

 

Total cost of revenue

   $ 8,417       $ 12,424           9,123         14,165   

 

 

Our gross profit represents total revenue less the cost of revenue, and gross margin is gross profit expressed as a percentage of total revenue. Our gross margins were 33%, 40% and 50%, respectively, for the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013. We expect our overall cost of revenue to increase in absolute U.S. Dollars as we continue to increase our volume of kits manufactured and tests performed. However, we also

 

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believe that we can achieve certain efficiencies in our manufacturing and laboratory operations, through these increased volumes, that could help maintain or improve our overall margins.

Research and development expenses

Our research and development efforts are focused on developing multiple new diagnostic tests that use our quantitative T cell measurement technology, including assays that would help transplant physicians better manage patients at risk of rejection and infection.

Our research and development expenses include those costs associated with performing research, development, clinical and regulatory activities and validating improvements to our technology and processes for the purposes of enhancing product performance. Research and development expenses include personnel-related expenses, including share-based compensation, fees for contractual and consulting services, travel costs, laboratory supplies, amortization, depreciation, rent, insurance, repairs and maintenance. We expense all research and development costs as incurred.

Given the relatively small size of our research and development staff and the limited number of active projects at any given time, we have found that, to date, it has been effective for us to manage our research and development activities on a departmental basis. Accordingly, we do not require employees to report their time by project nor do we allocate our research and development costs to individual projects.

During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, our research and development expenses represented 14%, 9% and 6%, respectively, of our total revenue. We expect that our overall research and development expenses will continue to increase in absolute U.S. Dollars as we focus on developing new diagnostic tests that utilize our T-SPOT technology platform.

Sales and marketing expenses

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, and our marketing and customer service personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits for these personnel, including share-based compensation, as well as travel costs related to sales, marketing and customer service activities, marketing and medical education activities and overhead expenses. We expense all sales and marketing costs as incurred.

During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, our sales and marketing expenses represented 83%, 54% and 33%, respectively, of our total revenue. We expect our sales and marketing costs to increase in absolute U.S. Dollars, as we expand our sales force, increase our geographic presence, and increase marketing and medical education to drive awareness and adoption of our current T-SPOT.TB test and future products.

General and administrative expenses

Our general and administrative expenses include costs for our executive, accounting and finance, legal, corporate development, IT and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including share-based compensation and travel costs, professional services fees, such as

 

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consulting, audit, tax and legal fees, costs related to our Board of Directors, general corporate costs, overhead expenses, and bad debt expense. We expense all general and administrative expenses as incurred.

During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, our general and administrative expenses represented 41%, 39% and 30%, respectively, of our total revenue. 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 and corporate governance expenses, including expenses related to compliance with the Sarbanes-Oxley Act, directors’ and officers’ insurance premiums and investor relations expenses.

Other income (expense)

Other income (expense) primarily consists of interest income, interest expense and exchange fluctuations. Interest income consists of interest earned on our cash and cash equivalents. During the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2013, this income has not been material, although we expect our interest income to increase following this offering as we invest the net proceeds from the offering. Pending application of the net proceeds from the offering, we plan to invest the net proceeds of the offering in short-term, interest-bearing, investment-grade instruments or other securities.

Interest expense consists primarily of interest expense on our loan balances and the amortization of debt discounts and debt issuance costs. We amortize debt issuance costs over the life of the loan and report them as interest expense in our statements of operations.

Monetary assets and liabilities that are denominated in foreign currencies are remeasured at the period-end closing rate with resulting unrealized exchange fluctuations. Realized exchange fluctuations result from the settlement of transactions in currencies other than the functional currencies of our businesses. The functional currencies of our businesses are U.S. Dollars, Pounds Sterling and Yen, depending on the entity.

 

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Results of operations

Comparison of nine months ended September 30, 2012 and 2013

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.

 

      Nine months ended September 30,          
     2012      2013      Change  
(in thousands, except percentages)    Amount     % of
revenue
     Amount     % of
revenue
     Amount      %  

 

 

Revenue:

               

Product

   $ 6,807        44 %       $ 14,888        52 %       $ 8,081         119 %   

Service

     8,599        56 %         13,671        48 %         5,072         59 %   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

     15,406        100 %       $ 28,559        100 %       $ 13,153         85 %   

Cost of revenue:

               

Product

     3,116        20 %         6,767        24 %         3,651         117 %   

Service

     6,007        39 %         7,398        26 %         1,391         23 %   
  

 

 

 

Total cost of revenue

     9,123        59 %         14,165        50 %         5,042         55 %   
  

 

 

 

Gross profit

     6,283        41 %         14,394        50 %         8,111         129 %   

Operating expenses:

               

Research and development

     1,232        8 %         1,583        6 %         351         28 %   

Sales and marketing

     7,895        51 %         9,557        33 %         1,662         21 %   

General and administrative

     5,784        38 %         8,457        30 %         2,673         46 %   
  

 

 

 

Total operating expenses

     14,911        97 %         19,597        69 %         4,686         31 %   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loss from operations

     (8,628     -56 %         (5,203     -18 %         3,425         -40 %   

Interest income (expense)

     (1,452     -9 %         (256     -1 %         1,196         -82 %   

Foreign exchange gains (losses)

     (492     -3 %         44        0 %         536         -109 %   

Other (expense) income

            0 %         114        0 %         114         —        
  

 

 

 

Loss before income taxes

     (10,572     -69 %         (5,301     -19 %         5,271         -50 %   

Income tax provision (benefit)

     21        0 %         35        0 %         14         67 %   

Net loss

   $ (10,593     -69 %       $ (5,336     -19 %       $ 5,257         -50 %   

 

 

 

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Revenue

Revenue increased by 85% to $28.6 million for the nine months ended September 30, 2013 compared to $15.4 million for the same period in 2012. This increase in revenue was due to an increase in volumes across all the regions where we sell our test. U.S. revenue grew by 61% driven by growth of $1.3 million from existing customers and $3.4 million from the addition of new customers as a result of an increased focus on selling to larger institutional accounts. Asia revenue grew by $8.0 million due to $2.4 million higher revenue in China and $5.7 million higher revenue in Japan where our T-SPOT.TB test was launched in the fourth quarter of 2012. We have seen significant demand for the test since its launch in Asia. Europe & ROW revenue growth was 8% over the same period in 2012.

 

      Nine months ended September 30,      Change  
(in thousands, except percentages)    2012      2013      Amount      %  

 

 

Revenue

           

Product

   $ 6,807       $ 14,888       $ 8,081         119%   

Service

     8,599         13,671         5,072         59%   
  

 

 

 

Total revenue

   $ 15,406       $ 28,559       $ 13,153         85%   

 

 

 

      Nine months ended September 30,      Change  
(in thousands, except percentages)    2012      2013      Amount      %  

 

 

Revenue

           

United States

   $ 7,826       $ 12,597       $ 4,771         61%   

Europe & ROW

     4,724         5,110         386         8%   

Asia

     2,856         10,852         7,996         280%   
  

 

 

 

Total revenue

   $ 15,406       $ 28,559       $ 13,153         85%   

 

 

 

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Cost of revenue and gross margin

Cost of revenue increased by 55% to $14.1 million for the nine months ended September 30, 2013 from $9.1 million in the same period in 2012. This increase in cost of revenue was due to the increased volume of kits sold and an increase in volume of tests sold through our laboratories in the United States and the United Kingdom. Gross margin increased to 50% in 2013 from 40% in 2012. The gross margin percent improvement was attributable to a reduction in material costs per test and efficiency from increased volume in our manufacturing operations. We have incurred costs related to the start-up of our new laboratory in Memphis, Tennessee and incurred extra costs related to running two labs. In the first quarter of 2013, we consolidated our U.S. laboratory operations in Memphis, Tennessee and closed our Marlborough, Massachusetts laboratory. Operating a single lab in the United States has begun to yield significant operating leverage that has also led to improving margins.

 

      Nine months ended
September 30,
     Change  
(in thousands, except percentages)    2012      2013      Amount      %  

 

 

Cost of revenue

           

Product

   $ 3,116       $ 6,767       $ 3,651         117%   

Service

     6,007         7,398         1,391         23%   
  

 

 

 

Total cost of revenue

   $ 9,123       $ 14,165       $ 5,042         55%   

 

 

Sales and marketing expenses

Sales and marketing expenses increased 21% to $9.6 million for the nine months ended September 30, 2013 from $7.9 million for the same period in 2012. The increase was primarily due to an increase in personnel-related costs associated with the expansion of the U.S. sales and marketing team and as a result of hiring sales, marketing, administrative and technical support personnel in our newly opened office in Japan. As a percentage of total revenue, sales and marketing expenses decreased to 33% for the nine months ended September 30, 2013 from 51% for the same period in 2012.

General and administrative expenses

General and administrative expenses increased by 46% to $8.5 million for the nine months ended September 30, 2013 from $5.8 million for the same period in 2012. The increase was due to accounting and auditing costs related to this registration statement and increases in personnel-related costs associated with increases in our legal, accounting and finance, IT and human resources headcount and corporate development and consulting costs to support our growth. As a percentage of total revenue, general and administrative expenses decreased to 30% for the nine months ended September 30, 2013 from 38% for the same period in 2012.

Research and development expenses

Research and development expenses increased by 28% to $1.6 million for the nine months ended September 30, 2013 from $1.2 million for the same period in 2012. This increase was primarily related to development project expenses and to the establishment of a technical team in the United States to improve processes efficiency and reduce costs in our U.S. laboratory operations. As a percentage of total revenue, research and development expenses decreased to 6% for the nine months ended September 30, 2013 from 8% for the same period in 2012.

 

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Interest expense, net

Interest expense, net was $0.3 million for the nine months ended September 30, 2013 as compared to $1.5 million in the same period in 2012. The 2013 expense consists primarily of interest expense on our term debt and revolving credit facilities. The 2012 expense also included interest on a revolving line of credit and a $1.3 million loan discount that was recorded as interest expense, related to a 2012 convertible bridge loan agreement with our existing investors.

Comparison of years ended December 31, 2011 and 2012

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.

 

      Year ended December 31,          
     2011      2012      Change  
(in thousands, except percentages)    Amount     % of
revenue
     Amount     % of
revenue
     Amount     %  

 

 

Revenue:

              

Product

   $ 6,281        50 %       $ 9,080        44 %       $ 2,799        45 %   

Service

     6,360        50 %         11,605        56 %         5,245        82 %   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     12,641        100 %         20,685        100 %         8,044        64 %   

Cost of revenue:

              

Product

     2,955        23 %         4,329        21 %         1,374        47 %   

Service

     5,462        43 %         8,095        39 %         2,633        48 %   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenue

     8,417        67 %         12,424        60 %         4,007        48 %   
  

 

 

 

Gross profit

     4,224        33 %         8,261        40 %         4,037        96 %   

Operating expenses:

              

Research and development

     1,780        14 %         1,947        9 %         167        9 %   

Sales and marketing

     10,536        83 %         11,177        54 %         641        6 %   

General and administrative

     5,232        41 %         8,068        39 %         2,836        54 %   
  

 

 

 

Total operating expenses

     17,548        139 %         21,192        102 %         3,644        21 %   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Loss from operations

     (13,324     (105)%         (12,931     (63)%         393        (3)%   

Interest income (expense)

     (3     0 %         (1,477     (7)%         (1,474     —       

Foreign exchange gains (losses)

     28        0 %         (626     (3)%         (654     —       

Other income (expense)

     76        1 %                0 %         (76     (100)%   
  

 

 

 

Loss before income taxes

     (13,223     (105)%         (15,034     (73)%         (1,811     14 %   

Income tax provision (benefit)

     (119     (1)%         (151     (1)%         (32     27 %   

Net loss

   $ (13,104     (104)%       $ (14,883     (72)%       $ (1,779     14 %   

 

 

Revenue

Revenue increased by 64% to $20.7 million for the year ended December 31, 2012 compared to $12.6 million for the year ended December 31, 2011. This increase in revenue was due to an increase in volume across all the regions where we sell our test. U.S. revenue grew by 85%, driven by growth of $2.7 million from existing customers and $1.6 million from the addition of

 

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new customers. Asia revenue grew by $2.3 million or 161% due to increased uptake of our T-SPOT.TB test in China since its launch in 2010. Europe & ROW revenue growth was 17% led by strong growth in our U.K. laboratory service volume.

 

      Year ended
December 31,
     Change  
(in thousands, except percentages)    2011      2012      Amount      %  

 

 

Revenue

           

Product

   $ 6,281       $ 9,080       $ 2,799         45%   

Service

     6,360         11,605         5,245         82%   
  

 

 

 

Total revenue

   $ 12,641       $ 20,685       $ 8,044         64%   

 

 

 

      Year ended
December 31,
     Change  
(in thousands, except percentages)    2011      2012      Amount      %  

 

 

Revenue

           

United States

   $ 5,604       $ 10,366       $ 4,762         85%   

Europe & ROW

     5,587         6,530         943         17%   

Asia

     1,450         3,789         2,339         161%   
  

 

 

 

Total revenue

   $ 12,641       $ 20,685       $ 8,044         64%   

 

 

Cost of revenue and gross margin

Cost of revenue increased by 48% to $12.4 million for the year ended December 31, 2012 from $8.4 million for the same period in 2011. This increase in cost of revenue was due to an increase in volume of tests ordered by our customers. In addition, we incurred costs related to the start-up of our new laboratory in Memphis, Tennessee and incurred extra costs related to running two labs until our Marlborough, Massachusetts lab was closed in the first quarter of 2013. Gross margin increased to 40% for the year ended December 31, 2012 from 33% for the same period in 2011. The gross margin percentage improvement resulted from an increase in volume of kits manufactured, reduction in material costs and leverage related to the significant increase in test volume processed through our U.S. lab operations.

 

      Year ended
December 31,
     Change  
(in thousands, except percentages)    2011      2012      Amount      %  

 

 

Cost of Revenue

           

Product

   $ 2,955       $ 4,329       $ 1,374         46%   

Service

     5,462         8,095         2,633         48%   
  

 

 

 

Total cost of revenue

   $ 8,417       $ 12,424       $ 4,007         48%   

 

 

Sales and marketing expenses

Sales and marketing expenses increased 6% to $11.2 million for the year ended December 31, 2012 from $10.5 million for the same period in 2011. The increase was primarily due to an increase in personnel-related costs associated with the opening our sales office in Japan and the addition of sales representatives in the United States. As a percentage of total revenue, sales and marketing expenses decreased to 54% for the year ended December 31, 2012 from 83% for the same period in 2011.

 

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General and administrative expenses

General and administrative expenses increased by 54% to $8.1 million for the year ended December 31, 2012 from $5.2 million in the same period last year. The increase was primarily due to the addition of 12 key management and professional positions in our accounting and finance, legal, IT and human resources departments, and other related costs to support our growth. As a percentage of total revenue, general and administrative expenses decreased to 39% for the year ended December 31, 2012 from 41% for the same period in 2011.

Research and development expenses

Research and development expenses increased by 9% to $1.9 million for the year ended December 31, 2012 from $1.8 million in the same period in 2011. The increase was primarily related to cost improvement activities. As a percentage of total revenue, research and development expenses decreased to 9% for the year ended December 31, 2012 from 14% for the same period in 2011.

Interest expense, net

Interest expense, net was $1.5 million for the year ended December 31, 2012 as compared to $3,000 for the same period in 2011. The 2012 expense included interest on a revolving line of credit and a $1.3 million loan discount that was recorded as interest expense, related to a 2012 convertible bridge loan agreement with then-existing investors. The 2011 expense was for interest on capitalized leases.

Quarterly results of operations

The following table sets forth selected unaudited consolidated quarterly statements of operations data for the eleven most recent fiscal quarters. We have prepared the consolidated quarterly operations data on a consistent basis with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly consolidated operations data reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of these data. Historical results are not necessarily indicative of the results to be expected in future periods, and the results for a quarterly period are not necessarily indicative of the operating results for a full year. This information should be read in conjunction with the consolidated financial statements included elsewhere in this prospectus.

 

     Three Months Ended  
(in
thousands)
  March 31,
2011
    June 30,
2011
    September 30,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013(1)
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue:

                     

Product

  $ 1,231      $ 1,788      $ 1,367      $ 1,894      $ 2,225      $ 2,199      $ 2,383      $ 2,273      $ 4,121      $ 5,790      $ 4,977   

Service

    1,042        1,449        2,166        1,703        2,449        2,712        3,438        3,006        3,558        4,364        5,749   

Total revenue

  $ 2,273      $ 3,237      $ 3,533      $ 3,597      $ 4,674      $ 4,911      $ 5,821      $ 5,279      $ 7,679      $ 10,154      $ 10,726   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (4,101   $ (2,478   $ (2,994   $ (3,531   $ (2,927   $ (4,034   $ (3,633   $ (4,289   $ (1,201   $ (954   $ (3,181

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   Net loss includes $1.6 million of accounting and auditing costs related to this registration statement, as described in Note 1, “Initial Public Offering (IPO) Costs,” to the Interim Condensed Consolidated Financial Statements.

Our revenue fluctuates from quarter to quarter as a result of a number of factors, many of which are outside our control. Our service revenue has historically been strong in the third quarter as a result of a concentration of testing in the United States related to college students returning to school, while the fourth quarter has historically been weaker due to the holiday periods and

 

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decreased screening activity in hospitals as they focus on other priorities. Additionally, we see fluctuation in our product revenue from quarter to quarter, due to ordering patterns, particularly relating to our large distributor customers. As a result of such factors, we expect to continue to see seasonality and quarter-to-quarter variations in our revenue.

Liquidity and capital resources

Sources of funds

Since our inception, we have incurred significant net losses and negative cash flows from operations. We incurred a net loss of $14.9 million and used $14.4 million of cash for operating activities for the year ended December 31, 2012. For the nine months ended September 30, 2013 we had a net loss of $5.3 million and used $13.4 million of cash for operating activities. As of September 30, 2013, we had an accumulated deficit of $96.3 million.

As of September 30, 2013, we had cash and cash equivalents of $13.0 million. To date we have financed our operations principally through private placements of our convertible preferred ordinary shares and convertible debt, borrowings from our credit facilities and revenue from the sale of our tests. Through September 30, 2013, we have raised $110 million gross proceeds through private placements of our convertible preferred ordinary shares and convertible debt.

Credit facilities

In February 2012 we entered into a loan and security agreement with Comerica Bank that provided for borrowings of up to $3.0 million initially through February 2013 and extended through May 2013. In February 2012, we borrowed $1.5 million under the credit facility. Interest accrues daily on the outstanding balance at the prime rate plus 1.5%, with a minimum of the Daily Adjusting LIBOR rate plus 2.5% per annum. The loan was secured by substantially all of our assets. This loan was repaid in May 2013.

In May 2013, we entered into a new loan and security agreement with Square 1 Bank consisting of a term loan and a revolving line of credit, and repaid the loan from Comerica Bank. The Square 1 loan is secured by substantially all of our assets. Tranche A of the term loan, which was borrowed at closing, is for $6.0 million. For the first year, interest only is payable. After the first year, the outstanding balance plus all accrued interest is payable in 36 equal monthly installments through the maturity date of May 24, 2017. Tranche B of the term loan, subject to achievement of certain revenue milestones, allows us to borrow $1.0 million from January 1, 2014 and January 31, 2014. Tranche B matures 36 months from the funding date. For the first 12 months interest only is due. After one year, Tranche B is payable in 24 equal installments. The term loan may be prepaid without penalty or premium and once prepaid, may not be reborrowed. The interest rate for Tranche A of the term loan is the greater of 2.75% above the prime rate or 6.0% per annum. If we achieve certain revenue milestones and borrow $1.0 million in Tranche B then the rates for Tranches A and B will be reduced to the greater of 2.5% above prime or 5.75% per annum. The revolving line of credit allows us to borrow up to $5.0 million, has a maturity date of May 24, 2015 and bears interest at 1.75% above the prime rate or 5.0% per annum, whichever is greater. The total amount outstanding as of September 30, 2013 was $6.0 million. We intend to use a portion of the net proceeds from this offering to repay this indebtedness. See “Use of proceeds.”

 

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Convertible promissory note

In October 2013, we issued a convertible promissory note in the amount of $5.0 million to Fosun Industrial Co., Ltd., which will convert at the time of this offering into our ordinary shares at a price per share which reflects a 10% discount to the offering price, or 396,825 shares based on an assumed initial public offering price of $14.00, the midpoint of the price range listed on the cover page of this prospectus. The shares issuable upon conversion will be subject to restrictions prohibiting sale or transfer of more than one-third of the shares each year for the first three years following this offering. In the event that the note is not converted into equity, the note bears interest at the rate of 8%, which is calculated and payable at the same time the principal is repaid. Unless otherwise converted into equity, the principal and interest must be repaid by July 1, 2016, although we may choose to repay the note earlier with no pre-payment penalties.

Summary of cash flows

Cash flows for the nine months ended September 30, 2012 and 2013

Operating activities

Net cash used in operating activities was $5.7 million during the nine months ended September 30, 2013, which included net loss of $5.3 million and non-cash items of $1.1 million. The non-cash items consisted of depreciation and amortization expense of $0.9 million, share-based compensation expense of $0.1 million and $0.1 million loss on change in fair value of warrants. We also had a net cash outflow of $1.5 million from changes in operating assets and liabilities during the period. The significant items in the changes in operating assets and liabilities included an increase in accounts receivable of $1.8 million, an increase in inventory of $1.4 million, an increase in prepaid expenses of $2.4 million and an increase in current liabilities of $4.2 million. The increase in accounts receivable and inventory was due primarily to the growth in our revenue. The increase in current liabilities was primarily related to deferred income and higher operating expenses due to growth in our business.

Net cash used in operating activities was $10.0 million during the nine months ended September 30, 2012, which included a net loss of $10.6 million and non-cash items of $2.1 million, offset by $1.5 million of net cash outflow from changes in operating assets and liabilities during the period. The non-cash items consists primarily of $0.6 million in depreciation and amortization and a $1.4 million loan discount that was recorded as interest expense, related to the 2012 convertible bridge note agreement with then existing investors. The change in operating assets and liabilities was primarily driven by an increase in our accounts receivable of $1.6 million and an increase in inventory of $0.4 million resulting from the growth in our revenue.

Investing activities

Net cash used in investing activities was $1.0 million and $1.3 million for the nine months ended September 30, 2012 and 2013, respectively. These amounts related primarily to purchases of property and equipment and a change in restricted cash pledged as security in connection with our facilities leases.

Financing activities

Net cash provided by financing activities was $7.4 million during the nine months ended September 30, 2013, consisting primarily of $2.9 million in proceeds from the issuance of G preferred ordinary shares and $6.0 million from borrowings under the Square 1 Bank loan, offset by Comerica Bank loan repayments of $1.5 million.

 

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Net cash provided by financing activities was $18.2 million during the nine months ended September 30, 2012, consisting primarily of $12.7 million in proceeds from the issuance of G preferred ordinary shares, $4.0 million in proceeds from the 2012 convertible bridge note agreement and $1.5 million from borrowings under the Comerica Bank loan.

Cash flows for the years ended December 31, 2011 and 2012

Operating activities

Net cash used in operating activities was $14.4 million during the year ended December 31, 2012, which included net loss of $14.9 million and non-cash items of $2.4 million. The non-cash items consisted primarily of a $1.4 million loan discount that was recorded as interest expense related to the 2012 convertible bridge note agreement, depreciation and amortization expense of $0.8 million and share-based compensation expense of $0.1 million. We also had a net cash outflow of $1.9 million from changes in operating assets and liabilities during the period. The significant items in the changes in operating assets and liabilities included an increase in accounts receivable of $3.1 million and an increase in inventory of $1.0 million offset by an increase in accrued expenses of $1.6 million and an increase in deferred revenue of $0.8 million. The increase in accounts receivable and inventory was due primarily to the growth in our revenue. The increase in accrued expenses was primarily related to increases in accrued employee related expenses and accrued royalties. The increase in deferred revenue relates to the growth in sales to our Japanese importer.

Net cash used in operating activities was $12.7 million during the year ended December 31, 2011, which included a net loss of $13.1 million, non-cash items of $0.9 million and $0.4 million of net cash outflow from changes in operating assets and liabilities during the period. The non-cash items consist primarily of $0.6 million in depreciation and amortization. The change in operating assets and liabilities was primarily driven by an increase in our accounts receivable of $1.0 million as a result of the growth in our revenue, and an increase in inventory of $0.3 million offset by increases in accounts payable and accrued expenses of $0.5 million and $0.4 million, respectively, to support our growth.

Investing activities

Net cash used in investing activities was $1.6 million and $1.9 million for the year ended December 31, 2011 and 2012, respectively. These amounts related primarily to purchases of property and equipment of $1.2 million and $1.5 million for the years ended December 31, 2011 and 2012, respectively, related to the expansion of our manufacturing and laboratory facilities in the United States and the United Kingdom. In addition, restricted cash pledged as security related to our facilities leases increased by $0.4 million and $0.3 million for the years ended December 31, 2011 and 2012, respectively.

Financing activities

Net cash provided by financing activities was $26.2 million during the year ended December 31, 2012, consisting primarily of $12.7 million in proceeds from the first tranche of the G preferred ordinary share financing, $8.1 million of proceeds received in advance related to the second tranche of the G preferred ordinary share financing, $4.0 million in proceeds from the 2012 convertible bridge notes and $1.5 million from borrowings under the Comerica Bank loan.

 

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Net cash provided by financing activities was $9.9 million during the year ended December 31, 2011, consisting primarily of $10.0 million in proceeds from the third tranche of the F preferred ordinary share financing.

Operating and capital expenditure requirements

We have not achieved profitability on a quarterly or annual basis since our inception and we expect to incur net losses in the future. We expect that our operating expenses will increase as we continue to invest to grow our customer base, expand our marketing and distribution channels, hire additional employees and increase product development expenditures.

Additionally, as a public company, we will incur significant audit, legal and other expenses that we did not incur as a private company. We believe that our existing capital resources, including funds available through our credit facility, together with the net proceeds from this offering, will be sufficient to fund our operations for the next few years.

Our future capital requirements will depend on many factors, including:

 

 

Our ability to continue to penetrate our existing market and new markets in the United States;

 

 

The costs and timing of further expansion of our sales and marketing efforts;

 

 

Our ability to penetrate existing markets outside the United States and enter and develop new geographies;

 

 

The progress that we make in developing new products based on our platform technology;

 

 

The percentage of sales that are reimbursed by payors and our ability to collect our accounts receivable;

 

 

Our ability to generate cash from operations; and

 

 

The acquisition of businesses or technologies that we may undertake.

Contractual obligations

We have contractual obligations for non-cancelable facilities leases, our credit facilities, equipment leases and purchase commitments. Purchase commitments include future minimum royalty, license, and exclusivity payments to be paid under our license agreements with third parties for access to certain technologies. The following table reflects a summary of our contractual obligations as of December 31, 2012.

 

      Payments due by period  
(in thousands)    Total      Less than
1 year
     1-3
Years
     3-5
Years
     More than
5 years
 

 

 

Operating lease obligations

   $ 5,119       $ 627       $ 1,815       $ 1,698       $ 979   

Credit facility obligations

     1,548         1,548                           

Purchase commitments

     12,477         1,423         3,082         3,196         4,776   
  

 

 

 

Total

   $ 19,144       $ 3,598       $ 4,897       $ 4,894       $ 5,755   

 

 

Critical accounting policies and significant judgments and estimates

We have prepared our consolidated financial statements in accordance with U.S. GAAP. Our preparation of these consolidated financial statements requires us to make estimates,

 

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assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the consolidated financial statements, as well as revenue and expenses 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 1 to our consolidated financial statements included 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 and accounts receivable

We derive revenue from the sale of our T-SPOT.TB diagnostic test to a broad range of customers including hospitals, public health departments, commercial testing laboratories, importers and distributors. We offer our T-SPOT.TB test in either an in vitro diagnostic kit or a service format.

Revenue from tests is generally paid directly by the customer and is recognized on the accrual basis when the following revenue recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) the kit has been shipped or delivered or, in the case of tests performed in our laboratory, when final results have been reported to the customer; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

In the United States, we also generate revenue from payments that are received from a variety of third-party payors, including government programs (Medicare and Medicaid) and commercial insurance companies, each with different billing requirements. Revenue from tests paid by third-party payors is recognized on an accrual basis based on our historical collection experience.

For kits sold in Japan, we recognize revenue after delivery to the wholesaler and when the wholesaler receives a firm order from its customer at which point our price becomes determinable.

Accounts receivable are primarily amounts due from hospitals, public health departments, commercial testing laboratories, distributors and universities in addition to third party payors such as commercial insurance companies (including managed care organizations), government programs (Medicare and Medicaid in the United States) and individual patients.

Accounts receivable are reported net of an allowance for uncollectible accounts. The process of estimating the collection of accounts receivable involves significant assumptions and judgments. Specifically, the accounts receivable allowance is based on management’s analysis of current and past due accounts, collection experience in relation to amounts billed, channel mix, any specific customer collection issues that have been identified and other relevant information. Our provision for uncollectible accounts is recorded as bad debt expense and included in general and administrative expenses. Although we believe amounts provided are adequate, the ultimate amounts of uncollectible accounts receivable could be in excess of the amounts provided.

Income taxes

We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis

 

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of our assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing NOLs and research and development credit carryforwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

We follow the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also prescribes the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. We accrue for the estimated amount of taxes for uncertain tax positions if it is more likely than not that we would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. We did not have any accrued interest or penalties associated with any unrecognized tax positions, and there were no such interest or penalties recognized during the years ended December 31, 2011 or 2012.

Share-based compensation

Share-based compensation includes grants of options to purchase ordinary shares. Currently, we maintain one share incentive plan pursuant to which we may grant options to purchase our ordinary shares, restricted stock units, or RSUs, and other share-based awards to our employees, directors and officers. This incentive plan is called the Amended and Restated 2008 Stock Incentive Plan, or the 2008 Plan.

We measure the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model, including the expected life of the award, volatility and dividend yield, and making certain assumptions about the award. We describe the assumptions and models that we use to estimate the fair value for share-based payment transactions in our financial statements included with this prospectus.

Our share-based compensation expense is as follows:

 

      Year ended
December 31,
     Nine months  ended
September 30,
 
      2011      2012      2012      2013  

Cost of revenue

   $ 4       $ 2       $ 2       $ 3   

General and administrative

     85         55         38         68   

Research and development

     4         4         4         0   

Sales and marketing

     32         18         15         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 125       $ 79       $ 59       $ 77   

Share-based compensation expense decreased by $46,000, or 37%, to $79,000 in 2012 from $125,000 in 2011. The decrease was due to the cessation of approximately $51,000 of expense associated with a large number of 2008 option grants with a four year vesting schedule and a 2007 vesting commencement date becoming fully vested during 2011, $46,000 of which was associated with options becoming fully vested during the fourth quarter of 2011. The decrease was partially offset by $9,000 of increased expense associated with options granted in 2012,

 

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approximately two-thirds of which were granted during the fourth quarter of 2012, therefore lessening the impact on the full year operating results.

Share-based compensation expense increased by $18,000, or 31%, to $77,000 in the nine months ended September 30, 2013 from $59,000 in the nine months ended September 30, 2012. This increase was primarily due to $42,000 in expense associated with options granted in the third quarter of 2013 at a fair value per share of $9.25, of which certain options were granted with a portion fully vested, as well as $19,000 in increased expense associated with options granted in the fourth quarter of 2012 and the first six months of 2013. This increase was partially offset by a $49,000 decrease resulting from the cessation of expense associated with a large number of 2009 option grants with a four year vesting schedule and a 2008 vesting commencement date becoming fully vested in 2012. In addition, of the options granted during the first nine months of 2013, 130,555 represented the reissuance of options previously granted and then subsequently cancelled. The reissuance of the options was accounted for as a cancellation and concurrent replacement resulting in a modification to the original award. As the options were reissued at a higher exercise price, this modification resulted in no incremental expense.

We use the Black-Scholes option pricing model to value the share option awards. The Black-Scholes option pricing model requires the input of subjective assumptions, including assumptions about the expected life of share-based payment awards and share price volatility. In addition, as a private company, one of the most subjective inputs into the Black-Scholes option pricing model is the estimated fair value of our ordinary shares. As a private company, the share price does not have sufficient historical volatility for us to adequately assess the fair value of the share option grants. Therefore, for all share option grants, we use the same comparable public companies that are used in our market approach valuation model, which is discussed further below, as a basis for determining our expected volatility. We intend to continue to consistently apply this methodology of using comparable companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available.

We determine the expected term for share option grants to employees based on the “simplified” method prescribed under Staff Accounting Bulletin Topic 14: Share-based Payments. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate is a weighted-average assumption equivalent to the expected term based on the United States Treasury yield curve in effect as of the date of grant. The assumptions used in calculating the fair value of the share-based payment awards represent our best estimate and involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, share-based compensation expense could be materially different in the future.

For the years ended December 31, 2011 and 2012 and the nine months ended September 30, 2012 and 2013, we calculated the fair value of share options granted under the Plan using the Black-Scholes option pricing model with the following assumptions:

 

      Year ended
December 31,
    Nine months
ended

September 30,
 
      2011     2012     2012     2013  

Volatility

     53.87     49.43     50.54     47.84

Expected term, in years

     6.25        6.25        6.25        6.24   

Dividend yield

                            

Risk-free interest rate

     1.75     1.03     1.21     1.38

 

 

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In accordance with ASC 718, Compensation—Stock Compensation, or ASC 718, we recognize expense based on the share option grant’s pre-defined vesting schedule over the requisite service period using the straight-line method for all employee share options. In addition to the assumptions used to calculate the fair value of the share options, we are required to estimate the expected forfeiture rate of all share-based awards and only recognize expense for those awards expected to vest. The estimation of the number of share awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period in which estimates are revised. We consider multiple factors when estimating expected forfeitures, including employee position and historical employee turnover data. During the period in which the share options vest, we will record additional expense if the actual forfeiture rate is lower than the estimated forfeiture rate and a recovery of expense if the actual forfeiture rate is higher than estimated.

Based upon an assumed initial public offering price of $14.00 per share, which is the estimated midpoint of the range listed on the cover page of this prospectus, the aggregate intrinsic value of our share options outstanding as of November 7, 2013 was $17.6 million, of which $8.0 million related to vested share options and $9.6 million related to unvested share options.

Valuation of share options

For all share option grants during the years ended December 31, 2011 and 2012 and the period beginning January 1, 2013 through September 30, 2013, the fair value of the ordinary shares underlying the share option grants was determined by our Board of Directors, with the assistance of an unrelated third-party valuation firm. When establishing the fair value of ordinary shares at each grant date, we relied upon the guidance provided by the American Institute of Certified Public Accountants, or the AICPA, in the AICPA Technical Practice Aid: Valuation of Privately-Held-Company Equity Securities Issued as Compensation, which we refer to as the “AICPA Practice Aid.”

Based on the guidance provided in the AICPA Practice Aid and ASC 820, Fair Value Measurements, or ASC 820, the recent transactions in our securities completed by independent investors represent the best indication of fair value of such security. In addition, new rounds of venture capital financing, which reflect the expectations of independent investors with respect to our future performance, usually provide a good indication of the fair value of the common equity securities. In this case, the fair value of the ordinary equity securities is derived based on the price paid by the venture capital investors for the preferred equity securities, taking into account the differences in various rights and liquidation preferences between ordinary and preferred equity securities. This method is also known as a back-solve approach. In cases where there are no transactions and/or new financings, the use of a discounted cash flow, or DCF, analysis and guideline public firm multiples, adjusted for unique characteristics of the issuing private firm, are accepted methodologies. All three methodologies have been used to establish the fair value of our ordinary shares.

For valuations performed and discussed below, our Board of Directors, with the assistance of an unrelated third-party valuation firm, applied three methods: a back-solve approach based on the recent rounds of venture capital financings, an income approach using a DCF analysis and a market approach based on market multiples of selected guideline firms. These approaches were employed in order to estimate the fair value of ordinary shares underlying the share option grants under the Plan during this period. These approaches are consistent with the guidance provided in the AICPA Practice Aid and ASC 820 and represent appropriate methodologies given our stage of development at the time of each valuation analysis.

 

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The market approach is a general way of estimating the value of a business using one or more methods that compare the subject company to similar businesses, business ownership interests, securities or assets that have been sold. The market approach arrives at an indication of value by comparing the entity being appraised to guideline publicly traded entities or comparable entities which have been recently acquired in arm’s-length transactions as well as prior company transactions. The guideline public companies method results in an indication of value by comparing the business being appraised to guideline publicly traded companies. After guideline companies are identified, various market-based valuation multiples are developed—e.g., enterprise value-to-revenue, enterprise value-to-cash flow, etc. The market-based valuation multiples are then applied to the subject company’s financial characteristics, resulting in an indication of value for the operations of the business enterprise and/or equity interest. Valuation discounts or premiums may be applied to reflect the unique characteristics of the business and/or equity interest being appraised. The market approach considered in our valuation model, as mentioned above, utilized the guideline company method by analyzing a population of comparable public companies. We selected those companies that we considered to be the most comparable to us based on their business model, strategic focus on the business and the degree to which the firms were serving the same customer base as we have. The selection of benchmarked companies requires us to make judgments as to the comparability of these companies to us and may change over time based on whether we believe the selected companies remain comparable to us. Based on these considerations, we believe that the companies we selected are a representative group for purposes of performing valuations. Under the market approach, we use these guideline companies to develop relevant market multiples and ratios, which are then applied to our corresponding financial metrics to estimate our equity value.

The DCF analysis, a variation of the income approach, is a general way of estimating the value of a business, business ownership interest, security or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount. This approach considers future income levels for the entity or asset under analysis usually based on historical or current income that, to an independent investor, is reasonably reflective of the sustainable/recurring level of income the entity may hope to obtain in future periods. The DCF method rests on the assumptions that: (i) a business is worth today what it can generate in future cash to its owners; (ii) cash today is worth more than an equal amount of cash in the future; (iii) future cash flows can be predicted; and (iv) the cost of capital and investors’ required returns can be estimated. This method assumes that the income derived from a business will, to a large extent, control the value of that business. In our analysis, the DCF model included the present value of invested capital net cash flow associated with the projected period, plus the present value of stabilized cash flow into perpetuity, referred to as the “terminal value.” We discounted the cash flows using an appropriate discount rate, which was derived using market-based cost of capital of the comparable public companies selected in our guideline company method under the market approach.

In our analysis, we considered an application of the discount for lack of marketability, or DLOM. Since a holder of a minority interest in the equity of a privately held company has no ready market for his or her interest other than by a private sale to another partner or a willing buyer, these equity securities lack marketability. Marketability refers to an owner’s ability to sell his interest, with nominal transaction costs, and to realize the cash proceeds of the sale in three to five business days. Accordingly, a DLOM should be applied to estimate the fair value of the shareholders’ equity in a privately held enterprise. The DLOM represents a discount necessary to generate a sufficient incremental return to the purchaser of a minority interest of an entity’s

 

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closely held shares to induce the purchaser to make this particular investment rather than an alternative investment identical in all respects, except marketability.

Based on the guidance provided in the AICPA Practice Aid and general SEC guidance, a put option model may be appropriate for determining the DLOM since it takes into account the expected life of the restriction and expected volatility. Typically, the Black-Scholes option-pricing model is used to estimate the DLOM by calculating a theoretical put option price for closely held shares. The put option price is then compared with the closely held company’s share price to derive an estimated DLOM. The basic inputs for the Black-Scholes model include: (i) share price, (ii) strike price, (iii) risk-free interest rate, (iv) expected option life, (v) interest rate, and (vi) expected volatility. The strike price is typically set to be equal to the market value of the underlying shares as of the date of the valuation analysis. The expected option life is equal to the assumed holding period, the interest rate is equal to the expected dividend rate, and volatility refers to the rate at which a share price moves up and down. Since a closely held company’s shares do not trade it is necessary to estimate the subject share price volatility by using comparable publicly traded company data.

In allocating the total equity value between our preferred ordinary shares and ordinary shares, we considered the liquidation preferences allocable to the preferred ordinary shares in determining valuations performed prior to the elimination of the preferences on these shares. Additionally, each valuation during this period utilizes the option-pricing method, or OPM, for allocating the total equity value between our preferred ordinary shares and ordinary shares.

The OPM (also known as Contingent Claims Analysis, or CCA) estimates the fair value of each class of security using call options. Similar to call options for publicly-traded stock, call options used in a CCA assign value to each class of security based on the potential to profit from the upside of the business while taking into account the unique characteristics of each class of security.

Each call option gives its owner the right, but not the obligation, to buy the underlying asset at a predetermined price, or exercise price. The exercise price is based on an equity value, rather than, in the case of a “regular” call option, the per-share price.

The equity value is represented by “breakpoints,” which are the points at which there is a change in the proportion of the claims of the various equity securities on the equity value change. Each more junior security is considered to represent a call option with a claim on the equity at an exercise price which settles all of the more senior claims and takes into account the unique characteristics of each class of security. Accordingly, the following steps were performed in our analysis using the OPM:

 

 

Step 1—Determined breakpoints based on the economic rights and preferences of the various classes of our securities;

 

 

Step 2—Selected inputs for the Black-Scholes option pricing model to determine the value of the call options; and

 

 

Step 3—Allocated the call option values among the different classes of equity securities based on their rights and individual characteristics.

The primary inputs and components of the OPM include the following:

 

 

Current price—The value of the underlying asset, which is represented by our enterprise or equity value.

 

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Exercise price or breakpoints—Breakpoints are enterprise values in which different classes of our equity securities participate in the value of the business. Breakpoints are determined by the rights and individual characteristics of the different securities, including the conversion ratio and any liquidation preference of the preferred shares and represent the amount at which an investor is indifferent between exercising the option or not.

 

 

Dividend yield—The dividend yield assumption generally reflects a company’s historical dividend yield.

 

 

Expiration date—The term of the option or the estimated time until a liquidation event.

 

 

Volatility—The amount of uncertainty or risk inherent in the size of changes in the underlying asset’s value. A higher volatility indicates that a security’s value can potentially be dispersed over a larger range of values, which means that the price of the security can change significantly, in either direction, over a short period of time. On the other hand, a lower volatility indicates that a security’s value does not fluctuate significantly in the short term, but, rather, changes in value at a relatively steady pace over a longer period of time. When used as a variable in option-pricing formulas, volatility represents the extent to which the return of the underlying asset will fluctuate between the valuation date and the option’s expiration. Volatility, as expressed as a percentage within option-pricing formulas, arises from daily trading activities. Volatility is generally measured based on historical results of guideline companies, or it can be implied based on market activity.

 

 

Risk-free rate—The nominal risk-free rate of return for the period commensurate with the expected term to the exit event.

The significant input assumptions used in our valuation models are based on subjective future expectations combined with the judgment of our Board of Directors.

 

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Valuations under the Plan

Below is a summary of option grants issued under the 2008 Plan during the period beginning January 1, 2011 through November 7, 2013:

 

Grant date   

Options

granted

   

Exercise

price

per share(1)

    

Fair value

per share(2)

 

February 17, 2011

     1,491      $ 0.25       $ 0.25   

June 8, 2011

     12,671        0.25         0.25   

July 28, 2011

     22,731        0.25         0.25   

August 12, 2011

     1,491        0.25         0.25   

October 20, 2011

     894        0.25         0.25   

December 31, 2011

     14,462        0.25         0.25   

February 29, 2012

     37,260        0.25         0.17   

March 8, 2012

     193,464        0.17         0.17   

April 17, 2012

     2,237        0.17         0.17   

October 24, 2012

     149        0.80         0.80   

October 29, 2012

     79,025        0.80         0.80   

November 7, 2012

     350,578        0.80         0.80   

November 16, 2012

     3,876        0.80         0.80   

December 7, 2012

     19,089        0.80         0.80   

December 31, 2012

     447        0.80         0.80   

January 4, 2013

     596        0.80         0.80   

January 31, 2013

     5,368        0.80         0.80   

February 18, 2013

     21,625        0.80         0.80   

February 28, 2013

     153,438 (3)      0.80         0.80   

March 25, 2013

     149        0.80         0.80   

April 8, 2013

     745        0.80         1.61   

April 15, 2013

     298        0.80         1.61   

April 22, 2013

     447        0.80         1.61   

May 1, 2013

     5,219        0.80         1.61   

May 6, 2013

     745        0.80         1.61   

May 20, 2013

     149        0.80         1.61   

May 28, 2013

     1,193        0.80         1.61   

June 1, 2013

     1,043        0.80         1.61   

June 3, 2013

     447        0.80         1.61   

June 11, 2013

     149        0.80         1.61   

June 17, 2013

     447        0.80         1.61   

June 18, 2013

     149        0.80         1.61   

June 19, 2013

     4,198        0.80         1.61   

June 24, 2013

     298        0.80         1.61   

June 29, 2013

     149        0.80         1.61   

August 5, 2013

     29,828        1.61         9.25   

August 6, 2013

     4,619        1.61         9.25   

 

 
(1)   The exercise price per share was the estimated fair value of an ordinary share on the date of each grant, as determined by our Board of Directors, taking into account various objective and subjective factors as described below, and using the assistance of an unrelated third-party valuation firm. In certain instances, the third-party valuation firm delivered its report, which was retroactive to a certain specified date, after the date our Board of Directors determined the fair value for an option grant.

 

(2)  

During 2011, 2012 and the first and third quarters of 2013, we performed contemporaneous valuations to estimate the fair value of our ordinary shares with the assistance of an unrelated

 

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third-party valuation firm. These valuations were used to determine the fair value of the options granted at the various grant dates set forth in the table above. In certain instances, as described in footnote (1) above, the valuation report was delivered after the date the options were granted, but was retrospective to an earlier date specified in the report. The significant input assumptions used in our valuation models during 2011, 2012 and 2013 are based on subjective future expectations combined with the judgment of our Board of Directors.

(3)   130,555 of these options represent the replacement of voluntarily cancelled non-statutory options granted on March 19, 2010, with the new award being tax-qualified but at a higher exercise price of $0.80, reflecting the most recent fair value per share at the time of reissuance.

The estimated fair value of our ordinary shares in April 2010 was $0.27. This valuation was based on the issuance of second tranche of units (consisting of one-third of an ordinary share and one F preferred ordinary share) which took place on April 30, 2010 and were issued at a price of $10.86 per share. By using the price paid for these units and calculating the breakpoints using the OPM (as described above), the value of our total equity and the fair value of ordinary shares implied by the F financing was simultaneously determined using a back solve technique. As preferred shareholders have rights that give them effective control of us, any equity value based on a preferred share financing reflects an incremental value associated with the right to control how our assets are deployed. Since this incremental value is allocated to all components of the capital structure by the OPM, we have removed the portion allocated to ordinary shares to reflect the fair value of a minority interest. The ordinary share control adjustment applied in this valuation analysis was 13.76%.

The estimated fair value of our ordinary shares in February 2011 was $0.25, which represents a decrease of $0.02 per share from the April 2010 valuation. This valuation was based on the issuance of a third tranche of units (consisting of one-third of an ordinary share and one F preferred ordinary share) which took place on February 28, 2011 and was also issued at a price of $10.86 per share. The valuation methodology was similar to that described in the April 2010 valuation noted above. The ordinary share control adjustment applied in this valuation analysis was 15.67%.

The estimated fair value of our ordinary shares in February 2012 was $0.17, which represents a decrease of $0.08 per share from the February 2011 valuation. This decrease was primarily due to the dilution that occurred because of the additional issuance of ordinary shares associated with the debt conversion. The value implied by the convertible debt financing using the OPM back solve methodology was considered as part of this valuation. However, due to the fact that the debt was issued to then-existing investors with the option to convert at the original F unit issue price of $10.86, we determined that the value implied by the financing may not fully meet the fair value standard and therefore other accepted methods should be used to establish fair value. As a result, an equity value was also calculated using a binomial method as well as the method of multiples. We then applied a DLOM of 9.87% to the equity value to ensure comparability with the other methods employed. The DLOM was calculated as the value of an at-the-money put option (as described above). This value reflects what a market participant would pay at the measurement date to ensure that the security can be sold at a point in the future at its liquid fair value. These three methods were then equally-weighted to determine the value of equity to be allocated to the various securities in our capital structure. The ordinary share control adjustment applied in this valuation analysis was 13.98%.

The estimated fair value of our ordinary shares in June 2012 was $0.80, which represents an increase of $0.63 per share from the February 2012 valuation. This increase was primarily supported by the issuance of G preferred ordinary shares which took place on June 15, 2012. Such

 

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shares had an issue price of $11.40 per share which represented an increase from the last fair value financing. As the financing was deemed to be at fair value, the ordinary share price was established by back solving the OPM such that the G preferred ordinary share price is equal to its issue price. The ordinary share control adjustment applied in this valuation analysis was 14.99%.

The estimated fair value of our ordinary shares as of March 31, 2013 was $1.61, which represents an increase of $0.81 per share from the June 2012 valuation. This increase was primarily due to an improvement in forecasted revenues and cash flows resulting from increased sales in Asia, particularly in China, and approval in the fourth quarter of 2012 by Japan’s Ministry of Health, Labour and Welfare, or the MHLW, as well as improving market conditions. To determine the estimated fair value of the Company as of March 2013, we calculated a value of $108,019,912, or $1.61 per ordinary share, using two equally weighted valuation method outcomes: the equity value based on the DCF analysis and the value that emerges when the equity value underlying the June 2012 financing is moved forward based on a Monte Carlo analysis. The value based on the DCF analysis was then adjusted for a DLOM of 10.44% using a put option methodology (as described above) as this value is based on market inputs that reflect a liquid market place. This methodology was selected to ensure that our projections underlying the DCF analysis were consistent with the assumptions underlying the June 2012 financing. The average returns as well as volatility of our guideline publicly traded entities were used to derive the assumptions applied in the Monte Carlo analysis. Such assumptions were calculated from the June 2012 financing date to the measurement date, resulting in an average return of 2.96% and a volatility of 7.23%. This methodology was adopted for three reasons: 1) the earlier financing was concluded to be at fair value, 2) the investors were informed market participants, and 3) less than one year had passed between the current measurement date and the earlier financing which means that many of the assumptions underlying the financing are still likely to be relevant and drivers of value at the measurement date. The ordinary share control adjustment applied in this valuation analysis was 14.82%.

As our Board of Directors did not determine the occurrence of an initial public offering to be likely until the third quarter of 2013, a probability factor for such event was not assigned as part of any of the valuation methodologies described above.

The estimated fair value of our ordinary shares as of August 19, 2013 was $9.25, which represents an increase of $7.64 per share from the March 2013 valuation. This increase was primarily due to the decision made by the Board of Directors during the third quarter of 2013 to begin preparations for an offering, which required a third valuation methodology to be incorporated into our estimate of the total fair value of our ordinary shares, as further described below. The increase in the estimated fair value of the ordinary shares primarily arises from the inclusion of this third valuation methodology under which the liquidation preferences allocable to the preferred ordinary shares were eliminated. The consideration of the liquidation preferences under the first and second valuation methodologies caused a reduction in the estimated fair value of the ordinary shares under those methodologies.

As with prior valuations, to determine the estimated fair value of our ordinary shares as of August 19, 2013, we first calculated a value of $120,156,184, or $1.74 per ordinary share, using two equally weighted valuation method outcomes: the equity value based on the DCF analysis and the value that emerges when the equity value underlying the June 2012 financing is moved forward based on a Monte Carlo analysis. The value based on the DCF analysis was then adjusted for a DLOM of 9.24% using a put option methodology (as described above) as this value is based on market inputs that reflect a liquid marketplace. The average returns as well as volatility of our

 

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guideline publicly traded entities were used to derive the assumptions applied in the Monte Carlo analysis. Such assumptions were calculated from the June 2012 financing date to the measurement date, resulting in an average return of 2.43% and a volatility of 7.86%. The ordinary share control adjustment applied in this valuation analysis was 13.12%. The small increase from the March 2013 valuation is directly related to our improved operating performance between the valuation dates.

In addition and as described above, due to our intent to prepare for an offering, a third valuation methodology was applied utilizing an offering scenario and resulted in a value of $191,460,475, or $16.76 per ordinary share. To calculate the offering scenario outcome, we evaluated the ratios of equity value to revenue for the guideline publicly traded entities used in the Monte Carlo analysis as well as entities identified by two investment banking firms. An average revenue multiple of 4.14 and a standard deviation of revenue multiples of 2.14 was then calculated at the measurement date. The weighted-average revenue multiple, calculated as the weighted-average of various multiples expected to emerge at the offering date plus/minus one standard deviation, was 4.99. The weighted-average revenue multiple was then multiplied by the expected trailing twelve month revenue as of February 2014 to obtain the expected equity value at the offering date. The resulting value was much higher than the value derived from the combined outcome of the first and second valuation methodologies, which did not take into account the offering, primarily due to the fact that the capital raising activity provided by an offering will allow the Company to take advantage of the growth opportunities that would not have been possible or highly unlikely without the infusion of new capital, as well as the fact that a public entity’s shares are more liquid and therefore have additional value.

A probability factor of 50% was then applied to both the combined outcome of the first and second valuation methods of $1.74 per ordinary share and to the outcome of the third valuation method using the offering scenario of $16.76 per ordinary share. The resulting values of $0.87 and $8.38 were then added together resulting in a combined fair value per ordinary share of $9.25.

The midpoint of the estimated price range reflected on the cover page of this prospectus, $14.00, is an increase of $4.75, or approximately 50%, as compared to the estimated fair market value of our common shares as of the date of the latest valuation performed in August 2013 of $9.25. The $13.00 low end of the estimated price range reflected on the cover page of this prospectus is an increase of $3.75, or approximately 40%. The increase is primarily due to the increased probability of the offering scenario (i.e., the occurrence of this offering) and the elimination of the preferred share preferences upon the conversion of preferred shares to ordinary shares in connection with this offering.

The assumptions used in determining the fair value of our ordinary shares represent the best estimate of our Board of Directors but are highly subjective and inherently uncertain. If our Board of Directors had made different assumptions, our calculation of the options’ fair values and the resulting share-based compensation expense could differ materially from the amounts recognized in our financial statements.

Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

 

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Quantitative and qualitative disclosure about market risk

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations and foreign currency exchange rate fluctuations.

Interest rate sensitivity

We are exposed to market risk related to changes in interest rates as it impacts our interest income and expense.

Cash and cash equivalents.    As of September 30, 2013, we had cash and cash equivalents of $13.0 million, and restricted cash of $449,000. Restricted cash primarily consists of amounts pledged as security for our facility leases in the United States. Our exposure to market risk includes interest income sensitivity, which is impacted by changes in the general level of U.S. and European interest rates. Our cash and cash equivalents are invested in interest-bearing savings and money market accounts. Our cash and cash equivalents are invested in interest-bearing savings and money market accounts. We do not enter into investments for trading or speculative purposes. Due to the conservative nature of our investment portfolio, which is predicated on capital preservation of investments with short term maturities, we do not believe an immediate one percentage point change in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be significantly affected by changes in market interest rates.

Term loan and line of credit.    As of September 30, 2013, we had debt obligations of $6.0 million under our credit facility with Square 1 Bank. The term loan carries a variable interest rate of 2.75% above the prime rate, with a floor of 6.0%. The revolving line of credit carries a variable interest rate of 1.75% above the prime rate, with a floor of 5.0%. If there is a rise in interest rates, our debt service obligations under our credit facility would increase even though the amount borrowed remained the same, which would affect our results of operations, financial condition and liquidity. Assuming no change in our debt obligations from the amount outstanding at September 30, 2013, a hypothetical one percentage point change in underlying variable rates would change our annual interest expense and cash flow from operations by approximately $60,000 without taking into account the effect of any hedging instruments. We have not entered into, and do not expect to enter into any interest-rate hedging arrangements. We intend to use a portion of the net proceeds from this offering to repay this indebtedness. See “Use of proceeds.”

Foreign currency exchange risk

We are exposed to foreign exchange rate risk. Because we currently operate in three major regions of the world: the United States, Europe & ROW and Asia, our revenue is denominated in multiple currencies. About half our sales are in the United States, which are denominated in U.S. Dollars. Sales in China are denominated in U.S. Dollars but these sales are made by our United Kingdom-based legal entity where the Pound Sterling is the functional currency. As a result, these sales are subject to remeasurement into Pounds Sterling and then translation into U.S. Dollars when we consolidate our financial statements. Sales in Europe are denominated primarily in the Pound Sterling and Euro. As we grow Europe & ROW sales outside the United Kingdom and the Euro Zone, we will be subject to risk from additional currencies. Sales in Japan are denominated in Yen, and our sales in Japan, which started in late 2012, have grown significantly in the first nine months of 2013.

 

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Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United States, the United Kingdom and Japan.

As we continue to grow our business outside the United States, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any foreign currency hedging contracts although we may do so in the future.

Recent accounting pronouncements

We have considered recent accounting pronouncements and determined that they are either not applicable to our business or that no material effect is expected on the consolidated financial statements as a result of future adoption.

JOBS Act

Under the JOBS Act, emerging growth companies that become public can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards following the completion of this offering and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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Business

Overview

We are a global, commercial-stage diagnostics company committed to improving patient care by providing advanced, innovative tests in the field of immunology. Our proprietary T-SPOT technology platform allows us to measure the responses of specific immune cells, known as T cells, to inform the diagnosis, prognosis and monitoring of patients with immunologically controlled diseases. T cells are a central component of the human body’s immune system, and are implicated in the control and progression of many medical conditions, including certain types of infectious diseases, cancers and autoimmune diseases.

The initial product we have developed using our T-SPOT technology platform is our T-SPOT.TB test, which is used to test for LTBI. Our T-SPOT.TB test has been approved for sale in over 50 countries, including the United States, where we have received PMA from the FDA, in Europe, where we have obtained a CE mark, as well as Japan and China. Our T-SPOT.TB test has been included in clinical guidelines for TB screening in 17 countries, including the United States, several European countries and Japan. In addition, we have established reimbursement for our test in the United States, as well as a CPT code that is used only for our test. We believe that many payors rely upon CPT codes to determine the amount they pay providers. Outside the United States, we have established reimbursement in several countries where reimbursement applies, including Japan, Switzerland and Germany. Our customers benefit from the existence of reimbursement mechanisms as it provides more certainty of the amount they will be paid for performing our test, as described in the section under the heading “– Funding and reimbursement.” We believe the annual global market opportunity for our T-SPOT.TB test is well in excess of $1 billion, assuming we can largely displace the TST in the developed world.

Tuberculosis remains a significant global public health problem. According to the WHO, approximately two billion people globally have LTBI, and on average each carries a 10% lifetime risk of progressing to active TB disease. In 2011, approximately 9 million people contracted active TB disease, of which approximately 1.5 million people died.

A central component of TB control strategies worldwide, particularly in developed markets, is to screen large numbers of people in high-risk groups for LTBI. These screening programs seek to identify infected people so that treatment can be administered to prevent these individuals from subsequently progressing to active TB disease and infecting others. According to the WHO, at least 50 million such screening tests are performed worldwide each year.

The vast majority of these tests are performed using the 100-year-old TST. Our T-SPOT.TB test is designed to replace the TST and has several important advantages over the TST.

Sales of our T-SPOT.TB test are growing rapidly. As of September 30, 2013, we had cumulatively sold over two million T-SPOT.TB tests, with approximately one million tests sold over the 12 months ended September 30, 2013. Over the last three years we have grown our revenue from $4.3 million in 2009 to $20.7 million in 2012, a compound annual growth rate of 69%. We attribute the growing commercial success of our T-SPOT.TB test to the following factors:

 

 

Compelling advantages over the TST.    Our T-SPOT.TB test enables better TB control due to its clinical, logistical and health-economic advantages. The cost-effectiveness of our T-SPOT.TB test versus the TST has been demonstrated in multiple studies and has been persuasive in adoption of the test.

 

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Broad regulatory approval and scientific validation.    Our T-SPOT.TB test is approved for sale in over 50 countries, giving us a substantial accessible market. The performance of our T-SPOT.TB test has been validated in over 300 peer-reviewed publications in scientific journals.

 

 

Supportive guidelines.    Our T-SPOT.TB test has been included in clinical guidelines for TB screening in 17 countries, including the United States, several European countries and Japan.

 

 

Established payment mechanisms.    We have established reimbursement in several key countries, including the United States, Japan, Switzerland and Germany.

 

 

Large underpenetrated market.    Our T-SPOT.TB test addresses the estimated global market of 50 million tests per annum, which we believe represents a market opportunity for us of well in excess of $1 billion. Our penetration of this market is in its early stages. We estimate that over 90% of testing is still performed with the TST, giving us a significant opportunity for long-term growth through displacement of the TST.

 

 

Flexible business model.    We offer our T-SPOT.TB test in two formats to accommodate customer preference and maximize sales. Our in vitro diagnostic kit format, which is available globally, allows customers to perform the test in their own institutions. In our service format, which we offer in the United States and the United Kingdom, we perform our T-SPOT.TB test on samples sent by customers to our laboratory facilities. Our service offering provides us with direct customer contact and, therefore, unique market insights.

 

 

Recurring revenue.    Once a customer begins using our T-SPOT.TB test instead of the TST, our experience is that the customer rarely goes back to using the TST. This purchasing pattern allows us to continually leverage our sales force to generate new business, rather than to maintain existing customers.

We are a global business with 151 employees, including sales and marketing teams, on three continents, and laboratories in the United States and the United Kingdom. We sell to customers in over 40 countries and derived 50% of our revenue from outside the United States for the year ended December 31, 2012. Our current customer base is comprised of over 1,000 active customers, consisting of hospitals, public health departments, commercial testing laboratories, importers and distributors. Our revenue for the year ended December 31, 2011 was $12.6 million, for the year ended December 31, 2012 was $20.7 million, and for the nine months ended September 30, 2013 was $28.6 million. Our net loss for the year ended December 31, 2011 was $13.1 million, for the year ended December 31, 2012 was $14.9 million and for the nine months ended September 30, 2013 was $5.3 million.

TB overview

Tuberculosis is a common and, if not properly treated, potentially lethal infectious disease caused by a bacterium called Mycobacterium tuberculosis. When an individual with active TB disease of the respiratory tract coughs, sneezes, yells or spits, respiratory fluid droplets that contain M. tuberculosis are expelled into the air and can infect others. TB typically infects the lungs, but the lymph nodes, kidneys, brain and bones may also be infected. Within two to ten weeks of the original infection, a specific T cell immune response usually develops. This immune response prevents further multiplication and spread of the TB bacteria. Individuals who have a successful T cell immune response will still have live bacteria in their body and are considered to have LTBI. Those with LTBI are asymptomatic and are not infectious; however, each person with LTBI has on average a 10% chance of progressing to active TB disease over his or her lifetime.

 

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TB is considered to have progressed to active TB disease when the body is unable to effectively control the replication of the TB bacteria and their growth causes damage to the body. This risk of progression to active TB disease is significantly elevated among individuals with weakened immune systems, such as smokers, those with HIV or diabetes or those on drugs that suppress the immune system (e.g., those taking biologic therapies for autoimmune disease or those undergoing immune-suppression post-transplantation). When a person develops active TB disease, the symptoms, including coughing, chest pains, weakness, weight loss, fever and night sweats, may be mild for many months. This can lead to delays in seeking care, which can result in transmission of the bacteria to others. As the disease progresses, the person may develop symptoms that can become increasingly worse. Without proper treatment, up to two thirds of people with active TB disease will die.

According to the WHO, approximately one-third of the world’s population, over two billion people, is infected with M. tuberculosis. This represents an enormous population of infected persons at risk of progressing to active TB disease. Despite the availability of an effective treatment, TB is one of the leading causes of infectious disease death worldwide. In 2011, the WHO estimated that approximately 9 million people contracted active TB disease, of which approximately 1.5 million people died. TB is a leading killer of people living with HIV, causing one quarter of all deaths in that population. Although TB rates are declining slowly across the world, even in the developed world, current screening and management tools have failed to eliminate the disease. For example, in the United States an estimated 11 million people have LTBI, which acts as a constant source of new infections. In addition, new cases of TB commonly arise from immigration and from travel to and from countries with higher incidence of TB.

There are three broad strategies to control TB: vaccination, finding and treating active TB disease, and finding and treating LTBI to prevent the development of new cases.

 

 

Vaccination.    The traditional means of seeking to protect individuals who may be exposed to infectious diseases is vaccination. The only vaccine available for TB is the BCG vaccine, which was first used in the 1920s. The vaccine is widely used around the world outside the United States; however, BCG’s efficacy is highly variable and it does not provide adequate protection against TB disease in adults. Therefore, the vaccine alone is insufficient to control TB.

 

 

Finding and treating active TB disease.    Although TB is typically a curable disease when treated with the standard multi-month regimen of potent antibiotics, diagnosing active TB can be problematic. For instance, TB symptoms are often non-specific and/or confused with other diseases, causing delays in seeking and receiving appropriate medical diagnosis. In addition, traditional diagnostic tests for active TB disease are imperfect. Delays in diagnosis result in increased morbidity and mortality and worsen the spread of TB infection, as people with active TB disease can infect as many as 10 to 15 people per year. The emergence of drug resistant TB strains is a growing problem, as they make treatment with standard anti-TB drugs more difficult and in some instances, where resistance is present to all front-line drugs, the mortality rate exceeds 50%.

 

 

Finding and treating LTBI.    The identification of individuals with LTBI by screening high-risk groups is an essential component of TB control in developed markets. In the United States, for example, screening high-risk groups has been an important practice for more than four

 

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decades. In the United States and other countries with a low incidence of TB, most new, active TB disease cases have occurred among persons who were once infected, contained the initial infection, and then later progressed from LTBI to active TB disease. The identification and treatment of individuals with LTBI prevents any further risk of these individuals progressing to active TB disease and prevents the further spread of TB.

The United States has one of the most comprehensive LTBI screening programs in the world. Several high-risk groups have been identified by the U.S. Centers for Disease Control and Prevention, or the CDC, for screening and subsequent treatment of LTBI, including:

 

 

healthcare workers;

 

 

those with immunosuppressive conditions, such as diabetes, certain carcinomas, organ transplantation and persons receiving immunosuppressive agents;

 

 

those with HIV and those working at HIV clinics;

 

 

refugees and immigrants from countries with high incidence of TB;

 

 

close contacts of active TB cases;

 

 

prisoners and jail detainees, as well as staff employed in prisons and jails;

 

 

intravenous drug users and staff employed at substance abuse centers;

 

 

homeless persons and staff employed at homeless facilities; and

 

 

those living in congregate living facilities, such as nursing homes or assisted living facilities.

In addition to the screening of high-risk groups recommended by the CDC, TB screening is also mandated by many states to include additional populations, such as day care staff, school teachers and pupils, and police officer candidates. Additionally, the screening of healthcare workers is recommended as part of the accreditation standards for U.S. hospitals and screening of certain U.S. military personnel for LTBI is included in military guidelines.

Generally, other developed markets have similar practices to screen high-risk groups for LTBI, although the populations screened may differ from those in the United States.

In total, we estimate that there are 22 million LTBI tests performed each year in the United States, the majority of which are performed within the healthcare system in a variety of settings, including hospitals, public health offices, physicians’ offices and clinics. Outside the United States, we estimate the total number of tests to be 28 million each year, for a combined market size of 50 million LTBI tests annually.

Current TB skin test and its limitations

The primary test currently used for TB screening is the 100-year-old TST. The TST is administered by injecting an extract from cultured M. tuberculosis, called Tuberculin or PPD, into the skin of a subject’s forearm using a needle and syringe. The injection of the PPD into the skin of a subject previously infected with TB stimulates the immune response, including T cells, causing the formation of a hard lump at the site of the injection. Because it takes time for this reaction to occur, the subject must return 48 to 72 hours after the PPD injection to have the result read. The test result is graded by feeling for the boundaries of the swelling, marking these with a pen and then measuring the diameter with a ruler.

 

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The TST suffers from several limitations, including the following:

 

 

Antiquated technique results in substantial test variability.    The technique of administering the PPD injection and reading the TST is inherently variable. Too little of the PPD may be injected to stimulate the appropriate response, the injection may be too shallow, allowing the PPD to leak out of the skin, or the PPD may be injected too deeply to stimulate the appropriate response. Because this technique is inherently operator dependent, healthcare workers who administer the PPD injections and read TST tests should undergo specialist training. However, even with such training, test results vary with the training levels, responsibility, and conscious and unconscious bias of the healthcare workers administering the injections and reading the tests. Variability in the size of the swelling due to administration of the injection averages approximately 15%. Similarly, variation in reading test results among experienced healthcare workers is also estimated at approximately 15%.

 

 

Multiple patient visits required.    The TST requires that the patient return 48 to 72 hours from the time of injection. This requirement presents a significant logistical challenge. Additionally, non-return rates can be as high as 30%, resulting in considerable time and money being wasted to persuade the subjects to be rescreened as well as the duplicated materials costs and time associated with retesting.

 

 

False negatives.    False-negative results to the TST are common due to a number of factors relating to the quality of the PPD used and the patient receiving the injection. Specifically, the PPD may be improperly stored, improperly diluted or contaminated. In addition, a fungal, viral or bacterial infection (including active TB disease) can suppress the TST response, leading to a false-negative. False negatives are also prominent among newborns and elderly subjects. Other conditions can also cause false-negative TST results, including HIV, certain live-virus vaccinations (e.g., measles, mumps and polio), chronic renal failure, nutritional factors, diseases affecting the lymphoid organs (e.g., Hodgkin’s disease, lymphoma, chronic lymphocytic leukemia and sarcoidosis), drugs (e.g., corticosteroids, tumor necrosis factor (TNF) biologics and many other immunosuppressive agents) and stress.

 

 

False positives.    False-positive results to the TST are common and are attributed to the presence in the PPD of antigens that are shared with other mycobacteria. As a result, the TST can cross-react in those patients who are infected with non-tuberculous mycobacteria as well as those patients who have received the BCG vaccine, which is the most widely administered vaccine in the world.

 

 

“Boosting” of results.    The TST result can also be “boosted,” which occurs when an infected subject’s reaction to an initially false-negative skin test causes increased sensitivity in a subsequent test such that it tests positive. The misinterpretation of a boosted reaction as a new infection with M. tuberculosis can result in unnecessary additional testing for the subject, unnecessary treatment and unnecessary testing of other personnel. As a result of this “boosting” effect, when the TST is used, the CDC recommends two-step testing for newly employed healthcare workers in order to ensure that an initial negative test is not a false negative. This recommendation effectively requires four patient visits when using the TST (two administrations of the PPD and two reads), a process that can lead to significant and costly delays in the hiring of new personnel at U.S. healthcare institutions.

 

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Our solution

Our T-SPOT.TB test is a highly sensitive and specific, single-cell based method for identifying LTBI. It is a single-tube blood test that directly measures antigen-specific T cells that indicate LTBI. Our T-SPOT.TB test has been approved for sale in over 50 countries, including the United States, in Europe, Japan and China. In addition, our T-SPOT.TB test is included in clinical guidelines for TB screening in 17 countries, including the United States, several European countries and Japan.

Our T-SPOT.TB test takes advantage of the T cell response that results from infection with M. tuberculosis. Our T-SPOT.TB test quantifies individual M. tuberculosis-sensitized T cells by challenging them with M. tuberculosis antigens that are recognized by the immune system. We employ two antigens, ESAT-6 and CFP10, to stimulate T cells that have previously been exposed to M. tuberculosis, which causes them to release a cytokine called interferon-gamma. Interferon-gamma is one of the dominant cytokines released by activated T cells when encountering M. tuberculosis. In contrast to the PPD reagent used in the TST, these two antigens are not shared with the BCG vaccine or with non-tuberculous mycobacteria. Because our test detects individual T cells via their release of interferon-gamma, our test is sometimes referred to generically as an IGRA.

We believe our T-SPOT.TB test has a number of compelling advantages that make it a superior alternative to the 100-year-old TST, including:

 

 

In head-to-head studies, our T-SPOT.TB test is frequently found to have higher sensitivity than the TST. In regulatory clinical trials (see “—Regulatory approvals and clinical validation”), we have demonstrated a sensitivity for the T-SPOT.TB test that exceeds 95%. In comparison, the TST is reported to have a sensitivity between 75-90% in similar populations. In addition, and unlike the TST, our T-SPOT.TB test is not significantly affected by immune-suppression.

 

 

Our T-SPOT.TB test is more specific than the TST, primarily because the antigens in our T-SPOT.TB test do not cross-react in individuals who have had the BCG vaccination or who have been infected with most other non-tuberculous mycobacteria.

 

 

Our T-SPOT.TB test requires a simple blood draw, which does not require specifically trained healthcare workers to administer the test.

 

 

There is no requirement for a return visit in 48 to 72 hours to obtain our T-SPOT.TB test result. This makes the testing process more convenient for patients and avoids the costs and inconvenience of readministering the test to those who fail to return to have the TST read.

 

 

Our T-SPOT.TB test does not suffer from the “boosting” phenomenon that can affect the TST, as there is no injection of immunogenic substances into the body. Consequently, with our T-SPOT.TB test, two-step testing for new hires, which entails four visits, is not required and pre-hire screening can be condensed to a single visit.

 

 

The combination of our T-SPOT.TB test’s greater accuracy and its logistical benefits means that the adoption of our T-SPOT.TB test can improve patient care while reducing costs for institutions.

The TST is often considered to be “cheap,” as the PPD reagent and other materials used in the test typically cost less than $5 per test. However, the cost of the TST itself is only one element of the total cost involved when conducting a TB screening program or TB control strategy. Substantial costs beyond the materials cost of the TST test include additional costs associated with: (i) false-negatives and false-positives to the TST; (ii) individuals who fail to return within the

 

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prescribed period; and (iii) implementing and maintaining training programs for healthcare workers who administer and read TST tests.

Several studies have been published investigating the costs or cost-effectiveness of a TB screening program using the TST and in comparison to our T-SPOT.TB test. We believe the following two studies are informative in demonstrating how expensive the TST actually is to implement and how deploying our T-SPOT.TB test in preference to the TST can be a more cost-effective solution when implementing TB screening programs.

 

 

Infection Control and Hospital Epidemiology (Lambert et al., 2003). This CDC-led study sought to determine the annual costs of implementing and maintaining TST screening programs for healthcare workers at hospitals and health departments. The authors concluded that compliance with the CDC guidelines regarding TB infection control may require a substantial investment in personnel time, effort and commitment. The costs of running a TST program were found to be between $41 and $362 per healthcare worker for hospitals and between $172 and $264 per healthcare worker for health departments. The materials cost of the TST itself amounted to less than 1.5% of the total cost of the screening program in all the studied institutions.

 

 

Journal of Occupational and Environmental Medicine:    The SWITCH study (Wrighton-Smith et al., 2012). The SWITCH study, conducted at The Johns Hopkins Healthcare System and Medical School, was conceived to systematically identify and then measure all the costs of screening healthcare workers using either a TST or an IGRA (specifically, our T-SPOT.TB test). The key study findings were that administering a TST testing program costs $73.20 per person screened, $90.80 per new hire, and $63.42 per annual screen. Use of an IGRA for employee health testing was found to be cost saving, with an IGRA test cost of $54.83 or less per test, and to result in higher screening completion rates due to the elimination of the need for a second visit to interpret the TST. Dr. Peter Wrighton-Smith, our Chief Executive Officer, contributed as an author and scientific collaborator in this study.

Although primarily designed for use in detecting LTBI, our test can also be used to assist in the diagnosis of active TB disease, particularly in suspected cases where conventional diagnostic methods such as chest x-ray or sputum smear are inconclusive. Because infection is a pre-requisite for disease, ruling out LTBI can aid physicians in diagnosing a different disease or condition. Our test has been included in guidelines in several countries for this purpose, such as those from the Netherlands, France, Ireland and Italy.

Our strategy

Our near-term objective is to increase adoption of our T-SPOT.TB test for screening and detecting persons infected with LTBI. Our longer-term objective is to leverage our proprietary T-SPOT technology platform, immunology domain expertise and regulatory experience to cost-effectively introduce other high-value immunology-based diagnostic tests. To achieve these objectives, our strategy is to:

 

 

Accelerate our penetration into proven market segments in the United States.    We intend to selectively invest in our direct sales and customer service teams to increase our capacity to fully cover the hospital and public health segments, which have primarily supported our success to date. In addition, we expect to build upon our marketing and medical education programs to

 

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increase awareness and understanding of the advantages of our T-SPOT.TB test over the TST by leveraging scientific publications, including the SWITCH study results.

 

 

Expand into other market segments in the United States.    We intend to increase our presence in other market segments where feasible, including physicians’ offices, universities, chronic care facilities and the military.

 

 

Expand our sales presence outside the United States.    We intend to make investments to expand our direct sales presence, particularly in Europe and Japan. In addition, we intend to establish a presence in select additional geographies to accelerate test adoption in countries where we already have regulatory approval.

 

 

Expand our addressable market outside the United States.    We intend to continue to invest in opening up new markets by gaining additional regulatory approvals. In addition, we intend to continue to invest to develop markets in which we already have regulatory approval through generating the data to yield supportive guidelines and reimbursement.

 

 

Launch new diagnostic tests.    We plan to leverage our proprietary T-SPOT technology platform, domain expertise in immunology, lab and commercial infrastructure, regulatory experience and customer relationships to launch new immunology-based diagnostic tests.

Regulatory approvals and clinical validation

Our T-SPOT.TB test is approved for commercial sale in over 50 countries. Key geographies where we have regulatory approval include:

 

 

The United States.    We obtained PMA for our T-SPOT.TB test from the FDA in 2008. Since 2008, an additional ten PMA supplements have been approved, including supplements relating to manufacturing improvements and label extensions, such as those that enable overnight shipment of blood samples.

 

 

Europe.    We obtained a CE mark in 2004, which allows us to sell our T-SPOT.TB test in Europe as well as other countries that accept the CE mark.

 

 

China.    We obtained approval for our T-SPOT.TB test from China’s State Food and Drug Administration, or the SFDA, in 2010.

 

 

Japan.    We obtained approval for our T-SPOT.TB test from the MHLW in 2012.

 

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Two key metrics measured by the regulatory bodies responsible for approving our T-SPOT.TB test are sensitivity, a measure of how many test positives there are in a population known to be infected, and specificity, a measure of how many test negatives there are in a population known to be uninfected. The following is a chart showing the performance of our T-SPOT.TB test in studies conducted in certain key geographies:

 

Country/Region (trial size)   Sensitivity (%)   Specificity (%)

 

United States (2,355 subjects)

  95.6%   97.1%

 

 

 

 

 

Europe (180 subjects)

  98.8%   100%

 

 

 

 

 

China (1,333 subjects)

  95.3%   Not applicable*

 

 

 

 

 

Japan (212 subjects)

  97.5%   99.1%

 

 

*   Specificity data are not available in the Chinese study because the design of the studies focused on active TB disease, for which specificity is not a relevant metric. In China, the positive and negative predictive values for the diagnosis of active TB disease were 95.4% and 93.9%, respectively.

These data, which were generated in controlled studies under strict regulatory standards, demonstrate that our T-SPOT.TB test is able to detect TB infection with high accuracy. In addition, our T-SPOT.TB test has also been validated in over 300 peer-reviewed publications in scientific journals.

Guidelines

We believe that clinical guidelines, which are recommendations issued by national medical societies or public health bodies, are a driving factor in a clinician’s decision to use a specific diagnostic test. Our T-SPOT.TB test is included in clinical guidelines for TB screening in 17 countries, including the United States, several European countries, and Japan.

Guidelines typically refer to our T-SPOT.TB test generically as an IGRA. Guidelines generally incorporate one of four common approaches: (1) a two-step approach in which TST is administered and subsequently followed by an IGRA, either when the TST is negative (to increase sensitivity, mainly in immunocompromised individuals) or when the TST is positive (to increase specificity, mainly in BCG-vaccinated individuals); (2) either TST or IGRA, but not both; (3) IGRA and TST together (to increase sensitivity); and (4) IGRA only, replacing the TST.

In recent years, the use of IGRAs has been increasingly recommended. For example, key recommendations contained in the CDC’s 2010 guidelines are as follows:

 

 

An IGRA may be used in place of a TST in all situations in which the CDC recommends TST as an aid in diagnosing TB.

 

 

An IGRA is preferred for testing persons from groups that historically have low rates of returning to have TSTs read.

 

 

An IGRA is preferred for testing persons who have received BCG (as a vaccine or for cancer therapy).

 

 

A TST is preferred for testing children under the age of five, though use of an IGRA in conjunction with a TST has been advocated by some experts to increase diagnostic sensitivity in this age group.

 

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An IGRA or a TST may be used without preference to test recent contacts of persons known or suspected to have active TB disease, with special considerations for follow-up testing. IGRAs offer the possibility of detecting M. tuberculosis infection with greater specificity than with a TST. Also, unlike TSTs, IGRAs do not boost subsequent test results and can be completed following a single patient visit.

We believe that these guidelines (and similar national guidelines outside the United States) allow us to access the vast majority of the current TST market and assert the superiority of an IGRA in significant segments of the market.

Market segments and revenue mix

We have a geographically diversified business. In 2012, our revenue was derived half in the United States and half outside the United States.

Our U.S. business derived 94%, 95% and 96% of revenue from our service offering (as opposed to kit sales) for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, respectively. The growth in our service offering reflects our experience that U.S. customers prefer to send out for IGRA tests than run them in-house. We categorize the U.S. market into four main areas:

 

 

Hospital based-testing.    We estimate that there are 7.0 million tests performed in hospitals in the United States each year. This test volume is made up primarily of testing of hospital employees, although there is also some in-patient and out-patient testing of high-risk patient groups. Testing in this segment is primarily non-reimbursed, with the test costs borne by institutional budgets. Consequently, test pricing results from direct negotiation with each institution. Our current average selling price is approximately $50 per test for this segment. We therefore believe that this segment has a total value of approximately $350 million.

 

 

Public health departments.    We estimate that there are 1.1 million tests performed by public health departments across the United States each year. This test volume is made up of testing contacts of infectious TB patients, testing of refugees and other immigrants and testing conducted in public health clinics, which covers testing for a wide variety of purposes. Testing in this segment is primarily non-reimbursed and thus subject to negotiated prices, although there are some testing populations in this segment that are covered by government payors. We currently collect approximately $45 per test for this segment. We therefore believe that this segment has a total value of approximately $50 million.

 

 

Physicians’ offices and clinics.    We estimate that there are 7.3 million tests performed in physicians’ offices and clinics across the United States each year. This test volume is made up of testing of various high-risk groups, including HIV patients, rheumatology patients and those undergoing immunosuppressive treatment regimens. Testing for these patients is typically reimbursed by Medicare, Medicaid and third-party commercial payors. We have limited experience with billing these payors, but based on our Medicare national limitation amount of $103 per test, we believe that we may be able to collect as much as $75 to $95 per test performed in this segment. Taking the mid-point of this estimate, this segment could have a potential value of approximately $620 million.

 

 

Other.    We estimate that each year there are 6.4 million tests performed in various other settings, including military installations, correctional facilities and universities and schools. This test volume is made up of testing various groups, including military personnel, prisoners and prison workers,

 

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foreign-born students and residents and workers in long-term care homes. Reimbursement coverage and mechanisms vary based on the tested population. Because of our limited experience in this segment to date, we cannot currently estimate the potential value of this segment.

Currently, we are primarily focused on, and derive the majority of our U.S. revenue from, the hospital and public health segments.

Our business outside the United States consists of sales in over 40 countries and represents a total potential market of over 28 million tests annually. Eighty-four percent, 83% and 89% of our revenue from outside the United States came from sales of kits and associated accessories, as opposed to service offering revenue, for the years ended December 31, 2011 and 2012 and for the nine months ended September 30, 2013, respectively. We, either directly or through our distributors, sell our testing kits primarily to hospital laboratories and commercial testing laboratories that perform the tests and provide test results to the ordering clinicians. Test prices are negotiated with each of our customers.

Funding and reimbursement

The funding and reimbursement structures for LTBI testing vary among countries, as discussed in more detail below.

United States

In the hospital and public health segments, TB testing programs are funded primarily from institutional budgets. We receive payment from these institutions according to our pre-negotiated prices. For other segments of the U.S. market (notably, for example, the physicians’ office segment) third-party reimbursement from governmental payors and/or private insurers is often available to cover the cost of our T-SPOT.TB test.

CPT codes are used by payors to identify services provided to patients and determine the appropriate level of reimbursement for such services. As such, obtaining a CPT code for a particular service facilitates payment to the provider. We applied for and were successful in obtaining a unique CPT code to cover our T-SPOT.TB test (code 86481), which became effective in January 2011. The reimbursement amount of this code was initially linked to CPT code 86480. We appealed this decision on the basis that our T-SPOT.TB test uses a different methodology and that this leads to differentiated clinical outcomes to the test covered under code 86480. Our appeal was successful and in January 2012 the reimbursement amount for code 86481 was increased by 22%. The current CMS national limitation amount for 86481 is $103. We have a national coverage determination for our CPT code 86481 from Medicare, which means we are able to obtain Medicare reimbursement nationally. Individual state agencies establish reimbursement levels for Medicaid. Our T-SPOT.TB test is currently reimbursed by Medicaid in 42 states and the District of Columbia, and our Oxford Diagnostic Laboratories®, or ODL®, facility is an enrolled provider with Medicaid in 30 states. We submit claims to these federal insurance programs and also to private insurers as an out of network laboratory. Based on our limited experience to date, we believe that our code is covered by most private insurers.

There are a number of other segments of the U.S. TB screening market, such as correctional facilities, military personnel, university students and chronic care facility residents. We believe that funding varies within and among these segments, encompassing both funding from institutional budgets and from third-party payors.

 

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Outside the United States

Although outside the United States we primarily negotiate pricing directly with our customers, our prices are influenced to some degree by the mechanism and level of funding our customers receive for performing LTBI testing. The funding mechanisms for selected countries are explained below.

Japan.    IGRAs are listed on the clinical lab fee schedule in Japan (code D015-25), which attracts a reimbursement level of ¥6,300 (approximately $63.14) per test. We believe that this reimbursement code covers all testing done in hospitals and clinics. There also exists a mechanism to partially reimburse public health entities for IGRA testing from central government funds.

China.    In China, test pricing is regulated by provincial government bodies. These bodies determine the price at which a test can be charged to the test recipient. To date, pricing approval has been granted for our T-SPOT.TB test in five provinces with test pricing in the range of RMB600-800 (approximately $114.39) per test. We believe that certain hospitals (e.g., military hospitals) fall outside of this formal pricing approval, in which case the test is funded from hospital budgets. Similarly, in provinces where no pricing approval exists, hospitals may still purchase and perform our T-SPOT.TB test, but testing must be funded using the hospitals’ pre-existing resources.

United Kingdom.    No formal centralized reimbursement mechanism for diagnostic tests exists in the United Kingdom. Instead, the testing is funded from institutional budgets whether we sell kits or our service offering.

Germany.    Outpatient testing is covered in Germany under the “EBM” reimbursement system. A code for IGRAs was established in January 2011 (Code 32670), which qualifies for reimbursement at 58 (approximately $76.54) per test. In addition, the cell-purification step inherent in our T-SPOT.TB test methodology can also attract an additional 10.40 (approximately $13.72) per test in reimbursement. Testing that is not eligible for EBM reimbursement (e.g., inpatient testing and public health testing) is typically funded from institutional budgets.

Sales, marketing and distribution

We currently market our T-SPOT.TB test directly in the United States, Northern Europe and Japan. Outside of these territories, we have contracted with third-party distributors. In countries where we have a direct presence, we use a combination of sales managers, sales representatives, customer service staff and technical experts to interact with clinicians, nurses, administrative staff, laboratories and other groups who are involved in the implementation of TB screening programs. Our goal is to educate these groups about the medical, logistical and economic benefits of switching from the TST to our T-SPOT.TB test. Our customer service staff and technical experts are also involved in the practical training of customers to perform and order our T-SPOT.TB test as well as answering customer questions. These teams are supported by marketing activities, which include advertising, medical education, attendance at scientific meetings and other awareness-raising activities. As of September 30, 2013, we had 56 employees engaged worldwide in sales, marketing and customer service functions.

Under our flexible business model, we currently offer our T-SPOT.TB test in either an in vitro diagnostic kit or a service format. In the former, we sell test kits and associated accessories to laboratories for them to perform the testing themselves. In the latter, we have established

 

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clinical testing laboratories in the United States and the United Kingdom, where we perform our T-SPOT.TB test on samples sent to us by customers. In these markets, we have found that many customers prefer to send samples to us rather than perform their own analysis on-site. We market our service offering under the name Oxford Diagnostic Laboratories, or ODL.

Our ODL service is typically comprised of the following steps:

 

 

We provide our customers with pre-paid sample packaging for shipping samples back to our laboratories for analysis.

 

 

The customer draws a blood sample and places it in our sample packs, along with a completed test requisition form.

 

 

The sample is picked up by our designated courier (although customers can also drop off samples themselves to courier locations) and shipped overnight.

 

 

When the package arrives at our ODL facilities, we unpack and enter the sample data into our LIS. The LIS assists us in sample processing and tracking and provides various automation options for result delivery and invoicing.

 

 

We process the sample and, once the test is complete, we report the results back to the customer and submit an invoice to the customer or, in certain cases, to a patient’s insurance provider. We have various mechanisms for customers to order and receive their results according to their preference, including fax, encrypted e-mail, web-portal or an interface with their electronic medical records system.

Our approximately 35,000 square foot U.S. ODL facility is located in Memphis, Tennessee, approximately ten miles from the FedEx global headquarters and sorting facility. We use FedEx as our courier for samples in the United States and have negotiated discounted shipment rates that our customers are able to take advantage of via our pre-paid sample shipment packs. We believe that our location gives our laboratory the competitive advantage of being able to access almost all parts of the continental United States with a patient-to-lab time of typically less than 20 hours. In addition, we believe it gives us market access and convenience advantages because customers can use our service wherever there is a FedEx pick-up or drop-off location. Further, as we typically receive the majority of our packages from FedEx’s sort facility at 4 a.m., Memphis time, each morning we are able to achieve turnaround times that we believe are substantially quicker than other competing laboratories. Our U.S. ODL facility is College of American Pathologists accredited and has obtained the necessary Clinical Laboratory Improvement Amendments, or CLIA, registrations to accept samples from all 50 states.

Our U.K. ODL facility is located within our manufacturing facility in Abingdon, England. We use the U.K. National Health Service courier, called DX, as our primary courier in the United Kingdom. Our U.K. lab is accredited to the ISO17025 quality standard.

Our technology platform

T cells are a central component of the human body’s immune system, and are involved in the control and progression of many medical conditions, including certain types of infectious diseases, cancers and autoimmune diseases. Our proprietary T-SPOT technology platform allows us to efficiently measure marker-specific T cell responses at a single-cell level and thereby inform the diagnosis, prognosis and monitoring of patients with immunologically controlled diseases. By

 

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measuring T cells, we can provide additional data to clinicians that are not available through existing methods, such as molecular diagnostics. For example, LTBI cannot be diagnosed by a molecular test.

We employ a proprietary quantitative method to detect antigen-specific effector T cells releasing interferon-gamma. Interferon-gamma is a principal immune messenger molecule, called a cytokine, released by effector T cells. Our technology is designed to selectively measure responses from this subtype of T cells because they are primarily present when active, replicating pathogens are inside the body, as opposed to other T cell subtypes that may be present long after an infection has been cleared from the body. For diagnosis and monitoring applications, it is more relevant to be able to measure the immune response associated with the current disease rather than the immune response associated only with past, cleared exposure.

Additionally, we have developed a patented method for enabling the processing of blood samples after they have been shipped overnight. This method involves the removal of contaminating granulocytes from the shipped sample to rejuvenate it prior to processing. Granulocytes are a normal component of whole blood. However, once blood is removed from the body, granulocytes start to progressively decay, which can cause contamination of the T cell containing white blood cell, or WBC, components used in T cell assays. In addition, decaying granulocytes release chemicals that can suppress cytokine secretion by T cells, further reducing test sensitivity. By removing granulocytes prior to starting an assay, we restore the sample to the same composition and function as a fresh sample. To further the commercialization of this technology, we use our T-Cell Xtend reagent in conjunction with our assay methodology. The T-Cell Xtend reagent is an antibody complex that binds granulocyte cells to red blood cells, thereby ensuring that they do not contaminate the WBC components used in our assay. By using the T-Cell Xtend reagent, we can test blood samples that have been shipped and/or stored for up to 32 hours before processing commences.

Our T-Cell Xtend reagent addresses the significant process limitation inherent in some laboratory tests that require a fresh blood sample for the assay. When this requirement exists, the diagnostic test may not be accessible for many subjects unless a local laboratory is available and able to quickly process the sample. An alternative approach is sometimes employed in which blood samples are carefully frozen before shipment to a laboratory. We believe this approach is impractical in regular clinical use, particularly when a large volume of samples is involved, and reduces sample quality. Our solution, the T-Cell Xtend reagent, addresses this problem without the need for freezing the blood. Specifically, our solution does not require the customer to do anything to process blood samples prior to shipment as the T-Cell Xtend reagent is added to the sample when it arrives in the laboratory. This approach is practical for routine clinical use and has the ability to significantly broaden the potential market for certain diagnostic tests.

We also employ proprietary manufacturing processes and protocols designed to cost-effectively and reliably produce key elements of our T-SPOT technology, including the process for coating microtiter plates with interferon-gamma antibodies and our quality control testing procedures. Further, we have developed proprietary methods designed to achieve rapid throughput in assay performance. These methods involve harvesting WBC components from whole blood and specific protocols related to the use of automation in the assay process.

The principles of our T-SPOT assay system, incorporating our T-Cell Xtend reagent, are shown in Figure 1.1 below, using blood as the body fluid in the example. The process starts with a blood

 

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sample, from which WBC components (specifically Peripheral Blood Mononuclear Cells, or PBMCs) containing T cells are separated, washed and counted. A pre-determined number of WBCs and antigens specific to the disease or condition of interest are then added to the wells of a microtiter plate to which antibodies to interferon-gamma, or IFN-g, are bound. The test is based on the principle that the T cells of an individual who carries an active infection will respond to the antigens and secrete interferon-gamma. The secretion of interferon-gamma by the T cells of the subject is captured by the anti-interferon-gamma antibodies coated to the floor of each well. The numbers of individual reacting T cells are enumerated through visualizing the footprint of each T cell by this secretion of interferon-gamma.

Figure 1.1: Principles of our T-SPOT assay system

LOGO

 

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Key features of this assay method that give it technical advantages over other platforms for measuring antigen-specific T cells include:

 

 

Ability to ship blood samples overnight.    We believe our intellectual property position and our T-Cell Xtend reagent give us an advantage in that we can ship blood overnight for T cell measurement assays. We believe this allows for much easier adoption of our technology, as customers do not need to go through labor-intensive freezing protocols prior to shipping samples and widespread access to the test can be accomplished without the need for a suitable local lab to run the test. In addition, overnight shipment allows the centralization of samples in a single testing facility, such as our ODL facilities, which can yield cost savings through economies of scale and gives us the advantage of direct relationships with the individuals and organizations who order the tests.

 

 

Low background noise.    The use of our T-Cell Xtend reagent, plus the separation and washing of WBCs prior to performing the test, ensure that the subsequent steps of the process start with a purified sample. Our assay system therefore has a low background noise that is essential for the detection of weaker responses, which is critical in many applications, including screening for TB.

 

 

Standardization.    We standardize the number of WBCs added to each well, which ensures that variations in WBC numbers, such as those caused by disease or immunosuppression, are eliminated prior to starting the assay. This is particularly relevant in populations with lower numbers of WBCs, such as HIV patients and other immunosuppressed groups. In addition, standardization of the number of WBCs is important to establish a stable baseline against which to validly compare longitudinal measurements within an individual. This standardization is thus important for disease monitoring indications.

 

 

High analytical sensitivity.    Our analytical method measures responses at a single-cell level, which, in combination with the two steps above, provides high analytical sensitivity. As a result, we are able to reliably detect specific T cells at frequencies of 1 per 50,000 WBCs or less.

 

 

Designed to be incorporated in standard clinical practice.    The sample collection process is designed to be easy to perform in a wide variety of clinical settings using a standard blood draw. By using industry-standard sample collection procedures, we believe our T-SPOT.TB test and subsequent assays we develop using our T-SPOT platform will be accessible to a wide variety of customers.

In addition to its technical advantages, our T-SPOT technology can be applied to diagnose and monitor a variety of diseases and conditions. First, by altering the target-specific antigen used in our T-SPOT assay, we can direct our technology platform to detection of different diseases or conditions where T cell function is involved. Second, our proprietary methods can be used to visualize cytokines other than interferon-gamma. Third, our methodology can be and has been successfully applied to other body fluids that contain T cells. This provides us the ability to detect T cell responses not just in the bloodstream, but also from T cells that have migrated to sites of disease.

As scientific knowledge increases regarding the potential utility of measuring T cell function to inform disease diagnosis and outcomes, we expect to have further opportunities to develop tests for diseases and conditions that are governed by an immunological response. We believe our technology platform will provide us with significant competitive advantages in this effort and enable us to become a leader in the field of immunology diagnostics.

 

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Research and development

Our research and development efforts are focused on developing new diagnostic tests that use our quantitative T cell measurement technology.

We believe that we have assembled experienced research and development teams across our sites with the scientific talent needed to develop new products that leverage our technology platform and immunology expertise. We believe that our experience in developing assays based on our T-SPOT method will allow us to conceive and develop assays and validate multiple tests on our platform. Our initial product, our T-SPOT.TB test, was developed, validated and commercialized within 18 months. Initially, we intend to focus our research and development efforts on potential tests for which the antigens are known, which eliminates the lead time required for antigen discovery.

We are currently investigating multiple opportunities to develop additional diagnostic tests, including assays that would help transplant physicians better manage patients at risk of rejection and infection. Because the antigens in this context are largely known, reducing the lead time required for antigen discovery, we believe that we may be able to develop a test for use in the transplant market more quickly and with less development risk. In addition, because we already have sales penetration in hospitals where such centers are generally located, we believe that we may be able to efficiently build upon our existing sales and marketing infrastructure in order to introduce a test in this market. Given that intensive patient monitoring is required in the first few years post-surgery, we believe that this can be a significant market for our tests. We believe our market opportunity in the transplant segment could be as high as $500 million annually.

As of September 30, 2013, we had 8 employees engaged in research and development functions. Our research and development expenses were $1.8 million and $1.9 million for the years ended December 31, 2011 and December 2012, respectively, and $1.2 million and $1.6 million for the nine months ended September 30, 2012 and September 30, 2013, respectively.

Intellectual property

We seek to secure and maintain protection of the proprietary aspects of our technology platform and of our existing and planned products. We rely on a combination of patents, trademarks, trade secret and other intellectual property laws, and confidentiality, license and invention assignment agreements and other contracts to protect our intellectual property rights. In addition, we have developed substantial knowledge in the field of immunology diagnostics including proprietary methods that we believe provides us with a significant advantage relative to potential competitors.

The intellectual property relating to our T-SPOT.TB test that we own or license includes 12 issued U.S. patents, more than 20 issued patents in other jurisdictions, 3 pending U.S. patent applications and 4 pending patent applications in other jurisdictions, as well as registered trademarks, proprietary manufacturing processes and protocols, and proprietary methods directed towards achieving rapid throughput in assay performance.

 

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Our owned and licensed patents

The table below identifies the patents and pending patent applications we own or to which we have license rights that relate to our T-SPOT.TB test.

 

Patent and patent
application numbers(1)
  Form of rights(2)   Expected
expiration date
   General description of subject matter

 

 

 

 

 

  

 

US 7,575,870,

US 12/510,594*,

EP 941478,

JP 4094674,

AU 728357,

CA 2,272,881

  In-licensed from Isis Innovation Limited   November 2017    Methods, including use of ELISPOT technique, to detect and quantify in vitro effector T cells that respond to pathogen specific antigen stimulation with the rele