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As filed with the Securities and Exchange Commission on July 1, 2015.

Registration No. 333-204622


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Amendment No. 6
to
Form S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933



NATERA, INC.
(Exact Name of Registrant as Specified in its Charter)



Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  8071
(Primary Standard Industrial
Classification Code Number)
  01-0894487
(I.R.S. Employer
Identification Number)



Natera, Inc.
201 Industrial Road, Suite 410
San Carlos, California 94070
(650) 249-9090
(Address, including zip code and telephone number, including area code, of registrant's principal executive offices)



Herm Rosenman
Chief Financial Officer
Natera, Inc.
201 Industrial Road, Suite 410
San Carlos, California 94070
(650) 249-9090
(Name, address, including zip code and telephone number, including area code, of agent for service)



Copies to:

Robert V. Gunderson, Jr., Esq.
John F. Dietz, Esq.
Richard C. Blake, Esq.
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
1200 Seaport Blvd.
Redwood City, California 94063
(650) 321-2400

 

Daniel Rabinowitz, Esq.
Secretary and General Counsel
Natera, Inc.
201 Industrial Road, Suite 410
San Carlos, California 94070
(650) 249-9090

 

Alan F. Denenberg, Esq.
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, California 94025
(650) 752-2004



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

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

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

          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. o

          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. o

          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. (Check one):

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



CALCULATION OF REGISTRATION FEE

               
 
Title of Each Class of Securities
to be Registered

  Amount to be
Registered(1)

  Proposed Maximum
Offering Price Per
Share

  Proposed Maximum
Aggregate Offering
Price(1)

  Amount of
Registration Fee(2)

 

Common Stock, $0.0001 par value

  11,500,000 shares   $18.00   $207,000,000   $24,054

 

(1)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.

(2)
The Registrant previously paid $14,198 of this amount in connection with the initial filing and subsequent amendments of this Registration Statement.



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

   


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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 state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued July 1, 2015

10,000,000 Shares

LOGO

COMMON STOCK



Natera, Inc. is offering 10,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $17.00 and $18.00 per share.



Our common stock has been approved for listing on the Nasdaq Global Select Market under the symbol "NTRA".



We are an "emerging growth company" under applicable federal securities laws and will be subject to reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves risks. Please see "Risk Factors" beginning on page 14.



PRICE $              A SHARE



 
 
Price to
Public
 
Underwriting
Discounts and
Commissions(1)
  Proceeds,
Before Expenses

Per Share

  $                 $                 $              

Total

  $                 $                 $              

(1)
See "Underwriting" for additional disclosure regarding underwriting discounts, commissions, and expenses.

We have granted the underwriters the right to purchase up to an additional 1,500,000 shares of common stock to cover over-allotments.

The underwriters expect to deliver the shares of common stock to purchasers on                           , 2015.

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



MORGAN STANLEY   COWEN AND COMPANY   PIPER JAFFRAY

BAIRD   WEDBUSH PACGROW

                       , 2015


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        Neither we nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

        Through and including                                    , 2015 (25 days after commencement of this offering), 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 the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.


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PROSPECTUS SUMMARY

        This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our financial statements and the related notes and the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

Overview

        We are a rapidly growing diagnostics company with proprietary molecular and bioinformatics technology that we are deploying to change the management of genetic disease worldwide. Our novel molecular assays reliably measure many informative regions across the genome from samples as small as a single cell. Our statistical algorithms combine these measurements with data available from the broader scientific community to detect a wide range of serious conditions with best-in-class accuracy and coverage. Our technology has been proven clinically and commercially in the prenatal testing space. We believe this success can be translated into the liquid biopsy space, and we are developing products for a number of oncology applications. In addition to our direct sales force in the United States, which we are continuing to expand, we have a global network of over 70 laboratory and distribution partners, including many of the largest international laboratories. We are enabling even wider adoption of our technology by introducing a global cloud-based distribution model. We have launched seven molecular diagnostic tests since 2009, and we intend to launch new products in prenatal testing and oncology in the future. In March 2013, we launched Panorama, our non-invasive prenatal test, or NIPT. Over 55,000 Panorama tests were accessioned during the three months ended March 31, 2015. Our revenues have grown from $4.3 million in 2010 to $159.3 million in 2014. Our net losses decreased from $37.1 million for the year ended December 31, 2013 to $5.2 million for the year ended December 31, 2014.

        Genetic inheritance is conveyed through a naturally occurring information storage system known as deoxyribonucleic acid, or DNA. DNA stores information in a linear sequence of the chemical bases adenine, cytosine, guanine and thymine, represented by the symbols A, C, G, and T. Billions of bases of A, C, G, and T link together inside living cells to form the genome, which can be read like a code or a molecular blueprint for life.

        While differences in the specific sequence and structure of this code drive biological diversity, certain variations can also cause disease. Examples of genetic diversity include copy number variations, or CNVs, and single nucleotide variants, or SNVs. A CNV is a genetic mutation in which relatively large regions of the genome have been deleted or duplicated, and an SNV is a mutation where a single base has changed. When single base changes are common in the population, that position on the chromosome is called a single nucleotide polymorphism, or SNP. When genetic variations are a cause of disease, such as Down Syndrome or breast cancer, detecting them within the patient's tissue sample can enable diagnosis and treatment. Our goal is to develop and commercialize non- or minimally invasive tests for the highly reliable detection of variations covering a broad set of diseases.

        Our approach combines proprietary molecular biology and computational techniques to measure genomic variations in tiny amounts of DNA, as small as a single cell. Our molecular biology techniques allow us to target over 20,000 regions of the genome simultaneously in a single test reaction, without losing molecules by splitting the sample into separate reaction tubes, so that all relevant variants can be detected. We believe our approach, which we call mmPCR, or massively multiplexed polymerase chain reaction, represents a fundamental advance in molecular biology. To make sense of this deep and rich set of biological data and deliver a diagnosis, we have developed computationally intensive algorithms that combine the data generated by mmPCR with the ever-expanding set of publicly available data on genetic variations. We have optimized these algorithms to enable laboratories around the world to run diagnostic tests locally, and access our algorithms in the cloud.

 

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        We have first applied our technology to prenatal testing, and we are leveraging our core expertise to develop blood-based diagnostic tests for cancer. In both prenatal testing and oncology, the use of blood-based diagnostic tests offers significant advantages over older methods, but the significant technological challenge is that it requires the measurement of very small amounts of relevant genetic material circulating within a much larger blood sample.

        In prenatal testing, our approach based on measuring thousands of SNPs simultaneously is fundamentally distinct from the approach employed in other commercially available NIPTs. Based on extensive data published in the journals Obstetrics & Gynecology, the American Journal of Obstetrics & Gynecology and Prenatal Diagnosis, we believe Panorama, our NIPT, is the most accurate NIPT commercially available in the United States.

        In oncology, we have demonstrated our ability to detect both CNVs and SNVs from very low concentrations of tumor DNA circulating in a blood sample. Because breast, ovarian and lung cancer are driven by both CNVs and SNVs, we believe that our approach is well-suited for early detection, recurrence monitoring and therapy selection for these cancers.

        We attribute our commercial success and future growth prospects to the following:

    Extensive expertise in both molecular biology and bioinformatics.  To achieve outstanding disease coverage and accuracy across multiple tests, molecular techniques must advance in tandem with statistical techniques. Our proprietary mmPCR technology allows us to target over 20,000 genomic variations simultaneously in a single test reaction. Our bioinformatics capabilities allow us to build billions of detailed models of the potential genetic states and compare them with known and measured genetic states of a target to determine the most likely diagnosis using a technique known as maximum likelihood Bayesian optimization. We believe that the power of these combined molecular and bioinformatics techniques provides us with our competitive advantage.

    Best-in-class performance and coverage.  From a single blood draw, our current commercial tests assess the risk of a broad range of conditions, which we refer to as "coverage," including common fetal aneuploidies, microdeletions, triploidy, and inherited genetic conditions that could be passed on from parent to child. A fetal aneuploidy is when a fetus has a different number of chromosomes than are typical. A microdeletion is a deletion of a region of DNA from one copy of one chromosome in an individual. Triploidy is when an individual has three copies of every chromosome instead of two. We estimate that all of these conditions combined are more than three times as prevalent in the general population as the three most common autosomal aneuploidies, which include trisomies 13, 18, and 21. In aggregated data from validation studies published in Obstetrics & Gynecology and Prenatal Diagnosis, Panorama has demonstrated combined sensitivity for the Down, Edwards and Patau syndromes and triploidy of greater than 99% and specificity of greater than 99.9% per disorder, which we believe makes Panorama overall the most accurate NIPT commercially available in the United States. In these studies, Panorama made no errors in fetal sex determination. A paper published in the August 2014 issue of Obstetrics & Gynecology reported that Panorama had a statistically significant lower false positive rate than the NIPT method practiced by our U.S. competitors. Our sensitivity for 22q11.2 deletion syndrome, which is caused by the deletion of a small piece of chromosome 22 and can be treated with early intervention at the time of birth to avoid seizures and reduce cognitive impairment, is greater than 95% for deletions of approximately 2.9Mb based on data published in the American Journal of Obstetrics & Gynecology. This sensitivity is considerably higher than that published for any competing microdeletions tests currently offered in the NIPT sector. For an explanation of how we measure sensitivity and specificity, see "Business—Overview."

    Independent sales force and global network of laboratory partners.  Our own direct sales force and managed care teams, both of which we have recently expanded, anchor our commercial engagement with physicians, laboratory partners, and payers. We can offer all of our products through our direct sales force and at a higher gross margin percentage than when we service customers through a

 

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      partner. The percentage of our overall accessioned tests generated through the higher margin U.S. direct sales force increased from approximately 25% in 2013 to approximately 44% in 2014, and to approximately 60% for the three months ended March 31, 2015. Where we have identified laboratory or distribution partners who share our focus on premium quality and service, we also contract with them to distribute our tests. We find this model to be particularly beneficial outside of the United States. Through our direct sales effort and worldwide network of over 70 laboratory and distribution partners, we have established a broad distribution channel that includes over 600 genetics-focused sales representatives. We and our laboratory partners have in-network contracts with insurance providers that account for over 140 million covered lives in the United States. Our target market for NIPT is a much smaller subset of these covered lives, because it excludes men, children and post-menopausal women who would not be users of our products. We are now a participating provider in 31 state Medicaid programs.

    Substantial intellectual property.  We have retained worldwide rights to our internally-developed molecular and bioinformatics technologies, with no royalty or licensing fee obligations on our core technologies. We have multiple issued patents covering aspects of our core technology in the United States and internationally. In prenatal testing, we believe our proprietary method represents a fundamentally differentiated approach.

    Cloud-based distribution model.  We are leveraging our cloud-based Constellation software to expand access to our molecular and bioinformatics technologies to laboratory partners worldwide. This approach allows us to scale more quickly, drive broader patient access, and leverage the rapid emergence of sequencing systems worldwide. We have begun using this distribution model with laboratories inside and outside the United States, for both commercial products and research applications. We also leverage Constellation to more efficiently perform our internal commercial laboratory activities and to perform research and development of our products. In July 2014, we achieved a CE Mark from the European Commission for Constellation and in May 2015, we achieved a CE Mark for the key reagent kits that our partners will need to run their portion of the Panorama test prior to accessing our cloud-based software. These two CE Marks enable our cloud-based distribution model in the European Union and other countries that accept a CE Mark. We are also engaged in discussions with the U.S. Food and Drug Administration, or the FDA, for use of a version of our software to support our cloud-based distribution model in the United States. The FDA has recently indicated to us that this software may be appropriate for review under the de novo classification process. The FDA has also stated to us that it will not prevent us from marketing the software in the United States while we continue to discuss how our software will be regulated and the FDA determines the regulatory pathway.

    Future applications of our technology connected with prenatal testing.  We expect to broaden our disease coverage in prenatal diagnostics, including by incorporating the ability to screen for additional disorders in our Panorama panel. We believe that this technology will allow us to capitalize on advances in isolating fetal cells from a mother's blood, which would allow us to measure more of the fetal genome non-invasively and with even higher accuracy. Recent publications in Science and Genome Medicine highlight the capability of our technology to determine what segments of the parent's chromosomes contributed to the DNA of a fetus and hence to reconstruct almost the entire DNA of a fetus in silico using only measurements of a tiny amount of fetal DNA. Consequently, we believe that we will have the ability to generate close to the full genome of an individual, roughly 9 weeks after the individual is conceived. The applications of this information from pregnancy through adulthood are extensive.

    Future applications of our technology beyond prenatal testing.  We believe that our ability to reliably analyze DNA at many thousands of loci at the scale of a single-molecule is very well suited for the early detection and monitoring of a wide variety of cancers. We are working with some of the world's leading cancer centers to collect samples and develop so-called "liquid biopsy" tests to analyze circulating tumor DNA of common forms of the disease, including breast, ovarian, and lung

 

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      cancer. We believe that such tests will reduce the need for invasive tumor biopsies, enable earlier detection of cancer and enhance treatment.

Proprietary technology drives our test performance and pipeline

        The sensitivity, specificity and coverage of our tests are driven by our proprietary mmPCR method of amplifying the DNA in a sample, and by our bioinformatics algorithm, which relies on a statistical technique known as maximum likelihood estimation, or MLE. MLE is widely used in other industries to enhance the quality of noisy or complex data inputs, such as in the conversion of a transmitted analog communication signal to a digital format. We have applied MLE to high-throughput genetic data. Our ability to multiplex over 20,000 primer sets in a single experiment allows us to achieve a high signal to noise ratio, or the ratio of useful information to irrelevant data, when detecting small amounts of DNA within a much larger sample.

        The analytic and clinical validity of our technology demonstrated in Panorama and our other products has been described in multiple peer-reviewed publications, including the journals Science, Human Reproduction, Molecular Human Reproduction, Fertility and Sterility, PLOS ONE, Genetics in Medicine, Prenatal Diagnosis, Fetal Diagnosis and Therapy, Obstetrics & Gynecology, Genome Medicine and American Journal of Obstetrics & Gynecology.

Panorama: Applying our molecular technology and bioinformatics to prenatal diagnostics

        We launched Panorama in March 2013. Panorama non-invasively screens for fetal chromosomal abnormalities, including Down syndrome, Edwards syndrome, Patau syndrome, Turner syndrome and triploidy, which often result in intellectual disability, severe organ abnormalities, and fetal demise. Panorama can be performed as early as nine weeks into a pregnancy, which is significantly earlier than traditional methods, such as serum protein measurement where doctors measure certain hormones in the blood. Based on data published in Prenatal Diagnosis, Fetal Diagnosis and Therapy and Obstetrics & Gynecology, Panorama demonstrated greater than 99% overall sensitivity for aneuploidies on chromosomes 13, 18 and 21 and triploidy and less than 0.1% false positive rate for each syndrome, which we believe makes it overall the most accurate NIPT commercially available in the United States. Sensitivity is calculated as the ratio between the number of individuals that test positive for the condition over the total number of individuals in the tested cohort who actually have the condition. A paper published in the August 2014 issue of Obstetrics & Gynecology, reported that Panorama had a statistically significant lower false positive rate than other NIPT methods practiced by our U.S. competitors. Based on data published in Obstetrics & Gynecology, Prenatal Diagnosis, and American Journal of Obstetrics & Gynecology, we have also demonstrated the ability to identify fetal sex more accurately than competing NIPTs. This is partially a result of Panorama's unique ability to detect a vanishing twin, which is a known driver of fetal sex errors with quantitative methods used by our competitors.

        We believe Panorama's specificity and sensitivity reduce the need for unnecessary confirmatory invasive procedures, lowering the total cost to the healthcare system of these procedures and limiting the resulting risk of spontaneous miscarriage. We believe Panorama's test performance has allowed us to command a price premium compared to other NIPTs while achieving over 55,000 Panorama tests accessioned during the three months ended March 31, 2015. A test is accessioned when we receive the test, the relevant information about the test is entered into our computer system and the test sample is routed into the appropriate sample flow.

        In 2014, we enhanced Panorama by adding the capability to screen for five of the most common genetic diseases caused by microdeletions, using our Panorama microdeletions panel. Microdeletions are missing sub-chromosomal pieces of DNA, which can have serious health implications depending on the location of the deletion. Based on data published in Prenatal Diagnosis and American Journal of Obstetrics & Gynecology, the combined prevalence of these targeted microdeletions is approximately one in 700 pregnancies, which together makes them more common than Down syndrome for women younger than approximately 32 years of age. Unlike Down syndrome, where the risk increases with maternal age, the risk

 

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of these five microdeletions is independent of maternal age. Therefore, we believe our microdeletions testing capability will be a significant driver of Panorama adoption in all risk categories, including those who are traditionally considered average-risk for Down syndrome. Panorama has demonstrated best-in-class performance screening for microdeletions. In validation studies, Panorama achieved sensitivity greater than 95% for deletions of approximately 2.9Mb for the 22q11.2 deletion syndrome and has been validated to perform at low fetal fractions. The two other NIPTs currently screening commercially for this condition claim to have sensitivity of only between 60% and 87%. For the three months ended March 31, 2015, approximately 83% of customers who ordered the basic Panorama panel directly from us have also ordered screening for 22q11.2 deletion syndrome or the full microdeletions panel. Based on the prevalence of these conditions in younger women and the performance of Panorama, we believe Panorama is the most appropriate cfDNA-based screening test for the growing NIPT market for average-risk pregnancies.  

        In April 2015, we updated both the molecular and bioinformatics portions of Panorama. These updates both reduce the cost of running Panorama and further increase the sensitivity of the test, allowing it to run with lower fetal fraction input. These updates lead to a less frequent need to require blood redraws from the patient, while further improving performance.

        We have launched seven prenatal genetic tests since 2009, and in 2015, we launched Constellation, our cloud-based software product, which is helping to enable our cloud-based distribution model. In addition to Panorama and our microdeletions panel, we also offer a carrier screening test (branded as Horizon), pre-implantation genetic screening and diagnosis for embryos prior to in vitro fertilization, or IVF (branded as Spectrum), and products of conception testing that identifies fetal chromosomal causes of miscarriage (branded as Anora). Using Constellation, we also have a non-invasive prenatal paternity test, which is marketed and sold exclusively by a partner from whom we receive a royalty.

Our development pipeline in oncology diagnostics

        We believe that our ability to interrogate genes at tens of thousands of points in parallel in a single reaction at the scale of a single molecule is well suited to the analysis of cancer-associated genetic mutations in circulating tumor DNA, or ctDNA. For the development of these products, we are working with world-renowned oncology centers, such as the Feinstein Institute for Medical Research at North Shore LIJ, Stanford University, Albert Einstein College of Medicine, Columbia University, Johns Hopkins University, Vanderbilt University and Cancer Research UK on research collaborations, clinical trials and engaging with their leading doctors on our oncology advisory board.

        We have demonstrated that our mmPCR platform can provide highly accurate detection of CNVs and SNVs in the plasma from patients with cancer, with sensitivities lower than 0.5% ctDNA for the detection of CNVs and approximately 0.01% ctDNA for the detection of SNVs. Our ability to simultaneously detect both CNVs and SNVs in ctDNA at very low concentrations in standard plasma samples drives our potential opportunity in the oncology diagnostics space. Because breast, ovarian and lung cancer are largely driven by CNVs, we believe that our ability to detect CNVs at low ctDNA levels will be well-suited for early detection, recurrence monitoring and therapy selection for these cancers.

        Based on the promise of our technology, we are currently developing non-invasive oncology diagnostic products to address several markets. For ovarian and lung cancer we are developing reflex tests and early detection and recurrence monitoring, for breast cancer we are developing early detection monitoring and recurrence monitoring, and we are developing a therapeutic monitoring product to cover various cancers. We currently anticipate that these tests will be initially commercialized as laboratory-developed tests, or LDTs.

Industry Overview

        Every individual has a unique genome and we believe that comprehensive knowledge of this genetic makeup is becoming integral to the practice of medicine. We also believe that eventually many individuals

 

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in a modern healthcare system will have their genome sequenced at birth, resulting in the potential for dramatic improvements in health and an overall reduction in healthcare costs through preventive care and better disease management. The ability to identify the presence of diseases early, easily, and inexpensively has the potential to impact the lives of millions of patients and save billions of dollars in healthcare costs. The rapid expansion of next-generation sequencing, or NGS, of DNA has unlocked a wealth of information about the role of genomics in disease, and is enabling a new class of diagnostic tests that improve patient care. As the cost and performance of next-generation sequencers continues to improve, we expect availability and demand for molecular diagnostic tests will continue to accelerate.

        In prenatal diagnostics, NIPTs use NGS to screen for chromosomal abnormalities, such as Down syndrome, by measuring fetal DNA circulating in the bloodstream of an expectant mother. According to the U.S. Centers for Disease Control and Prevention, or CDC, in the United States in 2013 there were approximately four million births, which included over 600,000 births resulting from pregnancies that were considered high-risk. Additionally, we estimate that there are over 12.5 million annual births in developed countries, including the United States, and over 16 million in China that fit our addressable market. We believe that the total addressable markets annually for our NIPT product and carrier screening product in the United States alone are approximately $2.5 billion and $2.0 billion, respectively.

        The first generation of NIPTs rely on quantitative methods, which simply measure the amount of DNA, to predict chromosomal abnormalities. All of our current competitors in the United States rely on this technique. These tests provided a valuable addition to older diagnostic techniques. However, they generally offer varying levels of sensitivity and specificity for whole chromosomal abnormalities, and we believe they are not well-suited for screening for many severe yet relatively common genetic disorders, such as microdeletions. A study in the New England Journal of Medicine found microdeletions or duplications in 1.7% of all pregnancies, indicating substantially higher prevalence rates than common fetal aneuploidies in the general population.

        Cancer remains one of the greatest areas of unmet medical need despite decades of advancement. The potential market opportunity for "liquid biopsies" in cancer focused on therapeutic monitoring, recurrence monitoring and diagnosis is significant and has the potential for broad applicability across a variety of tumor types. The American Cancer Society estimates that in 2015, there will be approximately 1.7 million new cancer cases diagnosed and more than 575,000 cancer deaths in the United States. We estimate that our planned therapeutic monitoring panel has the potential to address approximately 65%, or 1.1 million, of the annual new cases in the United States of cancer, including ovarian, breast, lung and many other cancers, translating to approximately 4.4 million tests per year and a total addressable market annually in the United States alone of approximately $6.6 billion.

        Furthermore, we have identified additional markets in early detection of cancers in high risk patients in lung, breast, and ovarian cancers. In lung cancer, our planned early detection test has the potential to address a market of an estimated more than 7 million individuals in the United States who have a history of smoking one pack of cigarettes a day for 30 years or more and are recommended by the U.S. Preventive Services Task Force for annual computed tomography scans. For breast and ovarian cancers, we are seeking to address approximately 6.5 million women in the United States, who self report a family history of breast cancer during routine screening, which is an indicator of high risk for both breast and ovarian cancers. We believe that addressable market size for early detection assays in lung, breast and ovarian cancer in the United States alone is $6.7 billion.

        We are also developing products for reflex testing for the stratification of current imaging modalities used for cancer detection. In lung cancer, with an estimated 27% of low-dose computed tomograph scans resulting in a positive result, we estimate a target market of 1.9 million patients in the United States. In breast cancer, with approximately 10% of the 39 million mammograms performed annually in the United States recalled for further workup, we estimate an annual market of approximately 3.9 million reflex tests. In ovarian cancer, we estimate 560,000 annual tests that could accompany positive findings on transvaginal

 

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ultrasounds. We estimate the anticipated total addressable market size for these reflex tests in lung, breast and ovarian cancer to be $3.2 billion.

Our Cloud-Based Distribution Model

        We sell our tests directly and partner with other clinical laboratories to distribute our tests globally. Currently, all of our products are LDTs and we perform most of our commercial testing in our laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA. However, our technology is compatible with standard equipment used around the world, and a range of NGS platforms, and we have developed the capability for our partner laboratories, under a license from us, to run their molecular assays themselves and then access our computation-intensive algorithms via a cloud-based distribution model for the final step of the analysis. As of June 20, 2015, we have entered into five contracts with laboratories outside of the United States and three contracts with laboratories within the United States to develop and run their own NIPT test under our cloud-based model. In addition, we have recently executed a license agreement with Clarient Diagnostic Services, Inc., a division of GE Healthcare, one of the largest oncology laboratories in the United States. Under this license, Clarient, which processes approximately 10% of the cancer tumor samples in the United States, will develop an oncology test to support pharmaceutical clinical trials based on our technology and employing Constellation.

        We believe that introducing a cloud-based distribution model provides us with a competitive advantage by allowing us to:

    Improve patient experience.

    Drive higher rates of reimbursement for our licensees.

    Accelerate international adoption by leveraging our licensees' existing capabilities.

    Efficiently achieve scale and reduce costs.

    Rapidly deliver innovations to our licensees.

Our Strategy

        Our vision is to deploy our powerful molecular technology and bioinformatics to change the management of genetic disease globally. Our strategy includes the following key elements:

    Drive adoption of Panorama in all pregnancy risk categories and all geographies.

    Extend and strengthen our direct sales force and existing relationships with laboratory partners.

    Continue to improve our cost structure.

    Apply our expertise in prenatal diagnostics to expand our offering.

    Leverage our technology to enable applications beyond prenatal testing.

Risk Factors

        Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled "Risk Factors" immediately following this prospectus summary. These risks include, among others, the following:

    We derive most of our revenues from Panorama, and if our efforts to further increase the use and adoption of Panorama or to develop new products in the future do not succeed, our business will be harmed.

    We have incurred losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future, which could harm our future business prospects.

    Uncertainty in the development and commercialization of our planned future cancer products or other new products could materially adversely affect our business, financial condition and results of operations.

 

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    Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock.

    If our agreements with our laboratory partners are terminated, as occurred last year with two of our largest partners, or our laboratory partners do not effectively market or sell Panorama, and we are not able to offset the resulting impact to our gross profit through our direct sales efforts or through agreements with new partners, our commercialization activities related to Panorama may be impaired and our financial results could be adversely affected.

    If we are unable to compete successfully with either existing or future prenatal testing products or other test methods, we may be unable to increase or sustain our revenues or achieve profitability.

    Our cloud-based distribution model may be difficult to implement, and may not be successful in satisfying any necessary regulatory requirements, including the FDA's draft guidances related to oversight of LDTs, if finalized.

    If the results of our clinical studies do not support the use of our tests, particularly in the average-risk pregnancy population, or cannot be replicated in later studies required for regulatory approvals or clearances, our business, financial condition, results of operations and reputation could be adversely affected.

    If our sole laboratory facility becomes inoperable, we will be unable to perform our tests and our business will be harmed.

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

    The marketing, sale, and use of Panorama and our other products could result in substantial damages arising from product liability or professional liability claims that exceed our resources.

    If we are unable to expand third-party payer coverage and reimbursement for Panorama and our other tests, if third-party payers withdraw coverage or provide lower levels of reimbursement due to changing policies, billing complexities or other factors, or if we are required to refund any reimbursements already received, our revenues and results of operations would be adversely affected.

    If the FDA were to begin actively regulating our tests as outlined in the FDA's October 3, 2014 draft guidances, we could incur substantial costs and delays associated with trying to obtain premarket clearance or approval and incur costs associated with complying with post-market controls.

    Changes in government healthcare policy could increase our costs and negatively impact coverage and reimbursement for our tests by governmental and other third-party payers.

    If the validity of an informed consent from a patient intake for Panorama or other tests was challenged, we could be precluded from billing for such testing or forced to stop performing such tests, which would adversely affect our business and financial results.

    Any failure to obtain, maintain, and enforce our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

        If we are unable to adequately address these and other risks we face, our business, financial condition, operating results, and prospects may be adversely affected.

Corporate Information

        We were initially formed in California as Gene Security Network, LLC in November 2003. We were incorporated in Delaware in January 2007, and we changed our name to Natera, Inc. in January 2012. Our principal executive offices are located at 201 Industrial Road, Suite 410, San Carlos, California 94070, and our telephone number is (650) 249-9090. Our website address is www.natera.com. We do not incorporate

 

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the information on, or accessible through, our website into this prospectus, and you should not consider any information on, or accessible through, our website as part of this prospectus.

        As a company with less than $1.0 billion in revenues during our last fiscal year, we qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012. As an "emerging growth company," we expect to take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

    being permitted to present only two years of audited financial statements and only two years of related "Management's Discussion and Analysis of Financial Condition" and "Results of Operations" in this prospectus;

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements and

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

        We may use these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a "large accelerated filer," our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

        We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

        The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

        Unless the context indicates otherwise, as used in this prospectus, the terms "Natera," "Company," "we," "us" and "our" refer to Natera, Inc. Natera, Prenatus, Powered by SNPs, Spectrum, Anora, Constellation, Horizon and Panorama and other trademarks or service marks of Natera appearing in this prospectus are the property of Natera. This prospectus contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Reverse Stock Split

        Our board of directors and stockholders approved a 1-for-1.63 reverse split of our capital stock, which was effected on June 19, 2015. All references to common stock, options to purchase common stock, restricted stock, share data, per share data, warrants, convertible preferred stock and related information have been retroactively adjusted where applicable in this prospectus to reflect the reverse stock split of our capital stock as if it had occurred at the beginning of the earliest period presented.

 

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THE OFFERING

Shares of common stock offered

  10,000,000 shares.

Shares of common stock outstanding after this offering

 

48,427,337 shares (49,927,337 shares if the underwriters exercise their over-allotment option in full).

Over-allotment option

 

We have granted to the underwriters the option, exercisable for 30 days from the date of this prospectus, to purchase up to 1,500,000 additional shares of our common stock.

Use of proceeds

 

We estimate that the net proceeds to us from the issuance of our common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $159.1 million, or approximately $183.5 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $17.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

We intend to use approximately $59.1 million of the net proceeds received by us from this offering for working capital and general corporate purposes and approximately $100.0 million for continued investments in research and development for our core technology and development of our product offerings. In addition, we may use a portion of the net proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. However, we have no current understandings, agreements or commitments for any material acquisitions at this time. See "Use of Proceeds."

Risk factors

 

See "Risk Factors" beginning on page 14 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

Nasdaq symbol

 

"NTRA".

        The number of shares of common stock that will be outstanding after this offering is based on 38,427,337 shares outstanding as of May 31, 2015, provided, however, that in the event that the actual

 

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initial public offering price is lower than $12.7629 per share, the shares of Series F preferred stock will convert into a larger number of shares of common stock, on an as-converted basis, and excludes:

    818,400 shares of common stock issuable upon the exercise of warrants outstanding as of May 31, 2015, with a weighted-average exercise price of $1.08 per share, of which 429,440 shares will automatically net exercise into approximately 429,029 shares of common stock upon closing of this offering, assuming an initial public offering price of $17.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

    33,742 shares of common stock issuable upon the deemed conversion of 33,742 shares of our convertible preferred stock, which are issuable upon the exercise of warrants outstanding as of May 31, 2015, with an exercise price of $1.8908 per share;

    9,099,241 shares of common stock issuable upon the exercise of options outstanding as of May 31, 2015, with a weighted-average exercise price of $2.86 per share;

    409,975 shares of common stock issuable upon the exercise of options granted after May 31, 2015, with an exercise price of $12.8501 per share; and

    5,396,831 shares of common stock, subject to increase on an annual basis, reserved for future grant or issuance under our stock-based compensation plans, consisting of:

    1,051,788 shares of common stock as of May 31, 2015 reserved for future grants under our 2007 Stock Plan, which shares will be added to the shares to be reserved under our 2015 Equity Incentive Plan, or the 2015 Plan, which will become effective in connection with the completion of this offering;

    3,451,495 shares of common stock reserved for future grants under our 2015 Plan;

    893,548 shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, which will become effective in connection with the completion of this offering; and

    an additional number of shares subject to awards outstanding under our 2007 Stock Plan that expire, terminate or are forfeited.

        Unless otherwise indicated, all information in this prospectus assumes:

    a 1-for-1.63 reverse stock split of our capital stock that was effected on June 19, 2015;

    that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

    the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 31,397,221 shares of common stock immediately prior to the completion of this offering, provided, however, that in the event that the actual initial public offering price is lower than $12.7629 per share, the shares of Series F preferred stock will convert into a larger number of shares of common stock;

    no exercise by the underwriters of their over-allotment option to purchase up to 1,500,000 additional shares of common stock from us; and

"Shares of common stock outstanding after this offering" above does not give effect to any additional shares issuable upon conversion of the Series F preferred stock if the actual initial public offering price is lower than $12.7629 per share. For example, in the event that the actual initial public offering price is $12.00, $11.00 or $10.00 per share, the aggregate number of additional shares of common stock issuable to the holders of Series F preferred stock will be approximately 276,460 shares, 696,915 shares or 1,201,460 shares, respectively.

 

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SUMMARY FINANCIAL DATA

        The following tables set forth our summary financial data. We derived the summary statements of operations data for the years ended December 31, 2013 and 2014 from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the three months ended March 31, 2014 and 2015 and the balance sheet data as of March 31, 2015 are derived from our unaudited condensed interim financial statements that are included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included all adjustments, consisting only of normal recurring adjustments, which in our opinion are necessary to state fairly the financial information set forth in those statements. You should read this summary financial data in conjunction with the sections titled "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results we expect in the future, and our interim results are not necessarily indicative of the results we expect for the full year or any other period.

 
  Year Ended
December 31,
  Three Months Ended March 31,  
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
 
 
  (In thousands, except per share data)
 

Statements of Operations Data:

                         

Revenues:

                         

Product revenues

  $ 54,955   $ 157,308   $ 27,209   $ 46,899  

Other revenues

    216     1,981     86     536  
                   

Total revenues

    55,171     159,289     27,295     47,435  

Cost and expenses:

                         

Cost of product revenues

    37,275     78,396     15,900     24,843  

Research and development

    11,550     17,292     4,298     5,630  

Selling, general and administrative

    31,614     62,936     14,379     23,239  
                   

Total cost and expenses

    80,439     158,624     34,577     53,712  
                   

Income (loss) from operations

    (25,268 )   665     (7,282 )   (6,277 )

Interest expense

    (1,873 )   (4,219 )   (809 )   (1,010 )

Interest expense from accretion of convertible notes

    (7,901 )            

Interest (expense) benefit from changes in the fair value of long-term debt

    (2,166 )   118     (806 )   (1,800 )

Other income (expense)

    98     (1,716 )   (719 )   (917 )
                   

Net loss

  $ (37,110 ) $ (5,152 ) $ (9,616 ) $ (10,004 )
                   
                   

Net loss per share, basic and diluted

  $ (9.66 ) $ (1.07 ) $ (2.09 ) $ (1.89 )
                   
                   

Shares used to compute net loss per share, basic and diluted

    3,841     4,800     4,591     5,289  
                   
                   

Pro forma net loss per share, basic and diluted (unaudited)

        $ (0.16 )       $ (0.27 )
                       
                       

Shares used to compute pro forma net loss per share, basic and diluted (unaudited)

          32,326           36,686  
                       
                       

 

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  As of March 31, 2015  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
  (In thousands)
 

Balance Sheet Data:

                   

Cash and cash equivalents

  $ 80,348   $ 80,348   $ 239,398  

Restricted cash

    1,346     1,346     1,346  

Working capital

    67,955     67,955     227,005  

Total assets

    120,104     120,104     279,154  

Long-term debt

    25,689     25,689     25,689  

Convertible preferred stock

    240,585          

Total stockholders' (deficit) equity

    (180,086 )   60,499     219,549  

        The preceding table presents a summary of our unaudited balance sheet data as of March 31, 2015:

    on an actual basis, except to the extent it has been adjusted to give effect to a 1-for-1.63 reverse split of our capital stock;

    on a pro forma basis to give effect to:

    the filing and effectiveness of our amended and restated certificate of incorporation; and

    the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 31,397,221 shares of common stock, provided, however, that in the event that the actual initial public offering price is lower than $12.7629 per share, the shares of Series F preferred stock will convert into a larger number of shares of common stock (for example, in the event that the actual initial public offering price is $12.00, $11.00 or $10.00 per share, the aggregate number of additional shares of common stock issuable to the holders of Series F preferred stock will be approximately 276,460 shares, 696,915 shares or 1,201,460 shares, respectively); and

    on a pro forma as adjusted basis to give further effect to the receipt by us of the estimated net proceeds from the sale of shares of common stock in this offering, assuming an initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        Each $1.00 increase (decrease) in the assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders' equity by $9.3 million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 increase (decrease) in the number of shares of common stock offered by us would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders' equity by approximately $16.3 million, assuming an initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We derive most of our revenues from Panorama, and if our efforts to further increase the use and adoption of Panorama or to develop new products in the future do not succeed, our business will be harmed.

        For the year ended December 31, 2014 and three months ended March 31, 2015, 74% and 94%, respectively, of Panorama product revenues were a result of orders placed through our direct sales force and international laboratory partners. Although we derive some revenues from our other products, we expect to continue to derive a significant portion of our revenues from the sales of Panorama, at least in the near term. We are in the process of increasing the awareness and adoption of Panorama among laboratories, clinics, clinicians, physicians, payers and patients. Continued and additional market acceptance of Panorama and our and our laboratory partners' ability to attract new customers are key elements to our future success. The market demand for NIPTs has grown in recent periods and is evolving, but this market trend may not continue or, even if it does continue to grow, physicians may not recommend and order Panorama, and our laboratory partners may not actively or effectively market Panorama. In addition, most third-party reimbursement for Panorama is from payers in the United States, with coverage primarily limited to high-risk pregnancies. Our future success is also dependent on our ability to develop new products in the future, such as in the field of cancer. A reduction in the demand for our current or future tests, or a reduction in the growth of such demand, could be caused by, among other things, lack of customer acceptance, competing technologies and services, regulatory restrictions, lack of sufficient reimbursement by third-party payers for Panorama or decreases in spending on prenatal testing. If the market and our market share fail to grow or grow more slowly than expected, our business, operating results and financial condition will be harmed.

        Our ability to increase sales and establish significant levels of adoption and reimbursement for Panorama is uncertain, and we may never be able to achieve profitability for many reasons, including, among others:

    the NIPT market may not grow as we expect, and NIPTs may not gain acceptance for use in the average-risk pregnancy population, which would limit the market for Panorama;

    laboratories, clinics, clinicians, physicians, payers and patients may not adopt use of Panorama on a broad basis, and may not be willing to pay the price premium over other NIPTs that we have, to date, been able to achieve, if we are unable to demonstrate to these constituencies that Panorama is superior to competing NIPTs with respect to value, convenience, accuracy, coverage, and other factors, such as the need on occasion to perform second blood draws on patients;

    third-party payers, such as commercial insurance companies and government insurance programs, may decide not to reimburse for Panorama, may not reimburse for uses of Panorama for the average-risk pregnancy population or for the screening of microdeletions, or may set the amounts of such reimbursements at prices that do not allow us to cover our expenses;

    the results of our clinical trials and any additional clinical and economic utility data that we may develop, present and publish or that comes from the commercial use of Panorama may be inconsistent with prior data, raise questions about the performance of Panorama, or may fail to convince laboratories, clinics, clinicians, physicians, payers or patients of the value of Panorama;

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    we, and our laboratory partners, may not be able to maintain and grow effective sales and marketing capabilities, and our sales and marketing efforts may fail to effectively reach customers or effectively communicate the benefits of Panorama;

    our laboratory partners may choose to offer tests provided by our competitors due to pricing or other reasons or otherwise fail to effectively market Panorama—for example, Progenity, Inc. and Quest Diagnostics Incorporated, which were our largest laboratory partners in 2013, terminated our contracts in 2014 and each began promoting the NIPT of a different one of our competitors, and now Quest promotes its own NIPT;

    we have recently expanded our direct sales force in the United States, relying to a much greater extent on our direct sales efforts and our own reimbursement arrangements with payers, and our new sales representatives may not be as effective as our sales representatives have been historically and may take longer than anticipated to become fully productive, and we may not be able to maintain or replicate our former laboratory partners' reimbursement arrangements with payers;

    a more effective and/or less expensive test for risk assessment of chromosome conditions in fetuses may be developed and commercialized;

    we may experience supply constraints, including due to the failure of our key suppliers to provide required sequencers and reagents, including with respect to the required sequencers and reagents from our supplier, Illumina, Inc., which is also one of our main competitors through its Verinata division;

    we may experience increased costs and expenses;

    the U.S. Food and Drug Administration, or the FDA, or other U.S. or foreign regulatory or legislative bodies may adopt new regulations or policies, or take other actions that impose significant restrictions on our ability to market and sell Panorama or our other tests; and

    we may fail to adequately protect our intellectual property relating to Panorama or others may claim we infringe their intellectual property rights.

Even if we are successful in addressing these risks with respect to Panorama, we may not be successful in addressing these risks in connection with our new products, including in the field of cancer.

We have incurred losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future, which could harm our future business prospects.

        We have incurred net losses since our inception in 2003. To date, we have financed our operations primarily through private placements of preferred stock, convertible debt and other debt instruments. Our net loss for the years ended December 31, 2013 and 2014 was $37.1 million and $5.2 million, respectively. Our net loss for the three months ended March 31, 2014 and 2015 was $9.6 million and $10.0 million, respectively. As of December 31, 2014 and March 31, 2015, we had an accumulated deficit of $179.8 million and $189.8 million, respectively, including in each case $107.4 million of non-cash interest expense from accretion of convertible notes. Such losses are expected to increase in the future as we continue to devote a substantial portion of our resources to efforts to increase adoption of, and reimbursement for, Panorama and our other products, improve these products, and research and develop future diagnostic solutions, including in the field of cancer. As a result of our limited operating history, our ability to forecast our future operating results, including revenues, cash flows and profitability, is limited and subject to a number of uncertainties. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in the life sciences and technology industry, such as the risks and uncertainties described in this prospectus. If our assumptions regarding these risks and uncertainties are incorrect or these risks and uncertainties change due to changes in our markets, or if

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we do not address these risks successfully, our operating and financial results may differ materially from our expectations, and our business may suffer.

Uncertainty in the development and commercialization of our planned future cancer products or other new products could materially adversely affect our business, financial condition and results of operations.

        We continue to focus research and development efforts on NIPTs, with an increasing effort to expand our platform and apply our expertise in processing and analyzing cell free DNA to the field of cancer. The launch of any new diagnostic tests, including those in the field of cancer, will require the completion of certain clinical development and commercialization activities and the expenditure of additional cash resources. We cannot assure you that we can successfully complete the clinical development of any other diagnostic test, including those in the field of cancer, or that we can establish or maintain the collaborative relationships that are essential to our clinical development and commercialization efforts. We also cannot assure you that we will be able to reduce our expenditures sufficiently or otherwise mitigate the risks associated with our business to raise enough capital to complete clinical development or commercialization activities. Clinical development requires large numbers of patient specimens and, for certain products, may require large, prospective, and controlled clinical trials. We may not be able to collect a sufficient number of appropriate specimens in a timely manner in the future to complete clinical development for any planned diagnostic test, including those in the field of cancer, or we may be unable to afford or manage the large-sized clinical trials that some of our planned future products may require. Such failures could prevent or significantly delay our ability to research, develop, complete clinical development and validation, obtain FDA clearance or approval as may be necessary or desired, or launch any of our planned diagnostic tests, including those in the field of cancer. Any failure to complete on-going clinical studies for our planned diagnostic tests, including those in the field of cancer, could have a material adverse effect on our business, operating results or financial condition.

Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock.

        Our quarterly results of operations, including our revenues, gross margin, profitability and cash flows, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. Fluctuations in quarterly results may adversely impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation, those listed elsewhere in this "Risk Factors" section. In addition, our quarterly results may fluctuate due to the fact that we recognize costs as they are incurred, but there is typically a delay in the related revenue recognition as we record most revenue only upon receipt of payment. Accordingly, to the extent sales increase, we may experience increased losses unless and until the related revenues are recognized. In addition, as we ramp up our internal sales and marketing and research and development efforts, we expect to incur costs in advance of achieving the anticipated benefits of such efforts. Finally, following the introduction of our cloud-based distribution model to additional laboratory partners, we may experience decreased revenues or slower revenue growth as the cost per test will be lower than for the laboratory-based model we presently offer. We also may face competitive pricing or reimbursement rate pressures, and we may not be able to maintain our premium pricing in the future, which would adversely affect our operating results.

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If our agreements with our laboratory partners are terminated, as occurred last year with two of our largest partners, or our laboratory partners do not effectively market or sell Panorama, and we are not able to offset the resulting impact to our gross profit through our direct sales efforts or through agreements with new partners, our commercialization activities related to Panorama may be impaired and our financial results could be adversely affected.

        We have expanded our U.S. direct sales force to increase our direct sales, but a significant element of our commercial strategy remains to establish and leverage relationships with our laboratory partners to sell Panorama and our other products both in the United States and internationally. The percent of our revenues attributable to our U.S. direct sales force for the year ended December 31, 2014 was 59%, up from 45% for the year ended December 31, 2013. The percent of our revenues attributable to U.S. laboratory partners for the year ended December 31, 2014 was 26%, down from 42% for the year ended December 31, 2013. The percent of our revenues attributable to international laboratory partners and other international sales for the year ended December 31, 2014 was 14%, up from 13% for the year ended December 31, 2013. The percent of our revenues attributable to our U.S. direct sales force for the three months ended March 31, 2015 was 80%, up from 39% for the three months ended March 31, 2014. The percent of our revenues attributable to U.S. laboratory partners for the three months ended March 31, 2015 was 6%, down from 46% for the three months ended March 31, 2014. The percent of our revenues attributable to international laboratory partners and other international sales for the three months ended March 31, 2015 was 14%, down from 15% for the three months ended March 31, 2014.

        In February 2013, we entered into a licensing and joint development agreement with Bio-Reference Laboratories, Inc., under which Bio-Reference has the right, on a non-exclusive basis, to: (a) sell Panorama and have us perform the tests; (b) develop and sell an NIPT based on our technology as its own laboratory-developed test, or LDT; and (c) access our algorithm to analyze the data that results from the test that Bio-Reference develops. In April 2015, we amended and restated this agreement. Our agreement with Bio-Reference lasts until April 2017, followed by three successive one year autorenewal terms, unless earlier terminated by either party in accordance with the agreement. Bio-Reference and OPKO Health, Inc. recently announced that OPKO Health has agreed to acquire Bio-Reference. We do not anticipate that such an acquisition would impact our agreement with Bio-Reference.

        Most of our international laboratory partner agreements were signed in 2013 and have an initial term of two years but may be terminated by either party with 60 days' notice. Certain of the agreements automatically renew for successive periods but may still be terminated by either party with 60 days' notice. While some of these agreements require the laboratory partner to exclusively sell Panorama, if the partner wanted to sell another NIPT, it could terminate our agreement upon the 60 days' prior notice.

        In 2014, our two largest laboratory partners in 2013, Quest and Progenity, terminated their agreements with us. We are engaged in litigation with Progenity regarding Progenity's termination of their agreement, amongst other issues, which is more fully described in "Business—Legal Proceedings."

        Quest, Progenity and Bio-Reference have been important contributors to our sales of Panorama. Our international laboratory partner relationships have been important to our ability to increase awareness of and expand utilization of Panorama overseas. For 2013, Quest, Progenity and Bio-Reference accounted for 16%, 12% and 5% of our total revenues, respectively, and our international sales accounted for 13% of our revenues. Quest and Progenity accounted for approximately 50% of our revenues from the sale of Panorama in the year ended December 31, 2013. Sales to Quest, Bio-Reference and Progenity represented 10%, 6% and 5% of our revenues in 2014, respectively. Sales to Quest, Bio-Reference and Progenity represented a combined 27% of our revenues generated from Panorama in the year ended December 31, 2014. As Progenity and Quest have done, other laboratory partners may decide to exercise their termination rights under our contracts, or any laboratory partner that is not bound by obligations of exclusivity or non-competition to us or our products could decide to sell a competing product and may choose to promote such tests in addition to or in lieu of our tests. Moreover, our partners could merge with

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or be acquired by a competitor of ours or a company that chooses to de-prioritize the efforts to sell our products. If Bio-Reference or our other laboratory partners were to exercise their termination rights or begin selling competing products, we may be unable to replicate the benefits we have received through these relationships with other laboratory partners or our direct sales capabilities, which would harm our business, operating results and financial condition.

        In addition to the risks of termination, having Panorama and our other products distributed through partners reduces our control over our revenues, our market penetration and our gross margin on sales by the partner if we could have otherwise made that sale through our direct sales force. The financial condition of these laboratories could weaken, these laboratory partners could breach their agreements with us or stop selling our products, or uncertainty regarding demand for our products could cause these laboratories to reduce their marketing efforts in respect of our products. Further, our laboratory partners may infringe the intellectual property rights of third parties, misappropriate our trade secrets or use our proprietary information in such a way as to expose us to litigation and potential liability. Disagreements or disputes with our laboratory partners, including disagreements over customers, proprietary rights or our or their compliance with contractual obligations, might cause delays or impair the commercialization of Panorama or our other tests, lead to additional responsibilities for us with respect to new tests, or result in litigation or arbitration, any of which would divert management attention and resources and be time consuming and expensive. For these reasons or others, these partnerships may not be successful. If this is the case, our ability to increase sales of Panorama and our other products and to successfully execute our strategy could be compromised.

Our rapid growth and recent substantially increased growth in and dependence on our direct sales force has placed strains on our training and compliance infrastructure.

        The percentage of our revenues attributable to our U.S. direct sales for the three months ended March 31, 2015 was 80%, up from 39% for the three months ended March 31, 2014. During this period we experienced rapid growth in our sales force and in our billing and marketing personnel. This growth has placed strains on our ability to adequately train personnel and monitor compliance with our policies and procedures. We are taking steps to increase our efforts and implement systems in both of these areas, but there can be no assurance that we will be successful in doing so. Our steps to implement appropriate monitoring of our sales, billing and other personnel is ongoing and we have in the past experienced, and there can be no assurance that we will not in the future experience, situations in which employees fail to adhere to our policies. In particular, we have received three inquiries from non-governmental third-party payers questioning communications of certain of our employees regarding our obligation to seek payment from patients of the unreimbursed portion of a test. Failure by our sales, billing, marketing or other personnel to follow our policies may cause third-party payers to refuse to provide all or any reimbursement for tests accessioned, may cause third-party payers to seek repayment from us of amounts previously reimbursed and harm our ability to secure in-network coverage with third-party payers. Any of the foregoing could adversely affect our revenue, cash flow and financial condition, and reduce our growth prospects.

If we are unable to compete successfully with either existing or future prenatal testing products or other test methods, we may be unable to increase or sustain our revenues or achieve profitability.

        Our principal competition comes from existing testing methods, technologies and products, including other NIPTs and carrier screening tests offered by our competitors, used by obstetricians and gynecologists, or OB/GYNs, maternal fetal medicine, or MFM, specialists or in vitro fertilization centers. Established, traditional first-line testing prenatal methods, such as serum protein measurement, where doctors measure certain hormones in the blood, and invasive prenatal diagnostics tests like amniocentesis have been used for many years and are therefore difficult to change or supplement.

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        We are engaged in commercial activities in the molecular testing field, which is characterized by rapid technological changes, frequent new product introductions, changing customer preferences, emerging competition, evolving industry standards, reimbursement uncertainty and price competition. If we fail to anticipate or respond adequately to technological developments, demand for our tests will not grow and may decline, and our business, revenue, financial condition and operating results could suffer materially. Moreover, many companies in this market are offering, or may soon offer, products and services that compete with our tests, in some cases at a lower cost than ours. We cannot assure you that research and discoveries by other companies will not render our existing or potential tests uneconomical or result in tests superior to our existing tests and those we develop. We also cannot assure you that any of our existing tests or tests that we develop will be preferred by customers or payers to any existing or newly developed technologies or tests. In addition, physicians may choose to recommend the tests of our competitors.

        We compete with numerous companies that develop NIPTs, including Sequenom, Inc., Illumina, Inc., through its Verinata division, Ariosa, Inc., which was recently acquired by F. Hoffman La-Roche Ltd, Laboratory Corporation of America Holdings, Counsyl, Inc., Quest, Beijing Genomics Institute, or BGI, and Berry Genomics Co., Ltd. Some of these NIPTs are sold at a lower price than Panorama. As NIPTs gain greater market acceptance, tests and services being offered or developed by the aforementioned and other companies could cause sales of our tests and services to decline or force us to reduce the cost of Panorama. We expect additional competition as other established and emerging companies enter the prenatal testing market, including through business combinations, and new tests and technologies are introduced. For example, F. Hoffmann La-Roche acquired Ariosa, Inc. in December 2014. We also compete against companies providing carrier screening tests such as Laboratory Corporation of America Holdings, Counsyl, Inc., Good Start Genetics, Inc., Progenity and Quest. Each of these companies offers comprehensive carrier screening panels, and other laboratories offer carrier screening testing for other diseases, particularly cystic fibrosis. Our products of conception, pre-implantation genetic screening, pre-implantation genetic diagnosis and non-invasive prenatal paternity testing products face competition from various laboratories that offer or seek to offer similar solutions. In addition, our future products, such as products in the field of cancer, will face competition from various companies that offer or seek to offer competing solutions. There are currently other companies, such as Guardant Health, Inc. and Personal Genome Diagnostics, Inc., that have developed and are offering commercially in the United States clinical cancer diagnostic tests that examine blood samples, rather than solid tumor biopsies, which are the type of cancer diagnostic tests that we are seeking to develop. There are a number of other companies seeking to develop such tests. These current and future competitors could have greater technological, financial, reputational and market access advantages than us, and we may not be able to compete effectively against them. Increased competition is likely to result in pricing pressures, which could harm our revenues, operating income or market share. If we are unable to compete successfully, we may be unable to increase or sustain our revenues or achieve profitability.

We may experience difficulties that delay or prevent our development, introduction or marketing of enhanced or new tests.

        Our success will also depend on our ability to effectively introduce enhanced or new tests. We have initiated efforts to perform single cell analysis in NIPT and to leverage our technology and processes in the field of cancer testing. The development of enhanced or new tests is complex, costly and uncertain. Furthermore, enhancing or developing new tests requires us to accurately anticipate patients', clinicians' and payers' needs and emerging technology trends. We may experience research and development, regulatory, marketing and other difficulties that could delay or prevent our introduction of enhanced or new tests. The research and development process in molecular diagnostics generally takes a significant amount of time from the research and design stage to commercialization. This process is conducted in various stages, and each stage presents the risk that we will not achieve our goals. For example, we may have to abandon a test in which we have invested substantial resources. In order to successfully commercialize tests that we may develop in the future, we may need to conduct lengthy, expensive clinical

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trials and develop dedicated sales and marketing operations or enter into collaborative agreements to achieve market awareness and demand. Any delay in the research and development, approval, production, marketing or distribution of enhanced or new tests could adversely affect our competitive position and results of operations.

        We cannot be certain that:

    we will be able to develop any test that meets our desired target product profile in order to address the relevant clinical need or commercial opportunity;

    any tests that we may enhance or develop will prove to be clinically effective in clinical trials or otherwise;

    we will be able to obtain necessary regulatory authorizations, in a timely manner or at all;

    any tests that we may enhance or develop will be successfully marketed by us and our laboratory partners or ordered and used by healthcare providers;

    any tests that we may enhance or develop can be provided at acceptable cost and with appropriate quality;

    our current or future competitors will not introduce tests that have superior performance, lower prices or other characteristics that cause physicians to recommend, and consumers to choose, such competitive tests over our enhanced or newly-developed tests; or

    third parties do not or will not hold patents in any key jurisdictions that would be infringed by our tests.

        These factors, and other factors beyond our control, could delay the launch of enhanced or new tests.

Our cloud-based distribution model may be difficult to implement, and may not be successful in satisfying any necessary regulatory requirements, including the FDA's draft guidances related to oversight of LDTs, if finalized.

        We have only recently begun to deploy our bioinformatics technology for use by other laboratories by making it available through a cloud-based distribution model. Only one partner is currently using the cloud-based model commercially to market its non-invasive prenatal paternity test, and two international partners are working on their commercial launches for NIPT. Other contracted partners for our cloud-based model are in earlier stages of development and still other potential partners are in the contract negotiation stage. We do not know whether we can build or support this model to scale. The launch of this platform for use in NIPT or oncology is subject to regulatory requirements, and its success is subject to both the risks affecting our business generally and the inherent difficulty associated with implementing a new strategy and platform and is dependent upon the skills, experience and efforts of our management and other employees and our relationship with, and efforts of, our partners. Launching this new cloud-based distribution model involves risks, significant costs and potential liabilities. Among the risks are the following: our ability to execute the strategy in a timely or efficient manner or at all; our and our partners' ability to obtain required regulatory authorizations from the FDA and international regulatory agencies; disruption of our business and distraction of our employees and management; transferring portions of our proprietary technology to third parties that may not take the same security precautions as we do to protect this information; and an inability to achieve anticipated benefits and costs savings, any of which may have an adverse impact on our business and results of operations. There is no assurance that we will be able to successfully implement the cloud-based distribution model or that implementation will result in benefits or cost savings at the levels that we anticipate or at all.

        We met with the FDA in July 2014 to discuss the regulatory status of our software that enables our cloud-based distribution model. The FDA has recently indicated to us that this software may be appropriate for review under the de novo classification process. However, the FDA has not committed to this position and may take a different position in the future. While the FDA has not yet determined the

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appropriate regulatory pathway for our software, the FDA has stated that it will not prevent us from marketing the software in the United States while we continue to discuss with the FDA how our software will be regulated and the FDA determines the regulatory pathway; however, it is possible that the FDA may reverse itself on the issue of our ability to continue to market the software during our discussions. The FDA's October 3, 2014 draft guidances describing its plans to regulate LDTs described in "Business—Government Regulations" could also affect the utilization of the software by laboratory customers.

        If our cloud-based software is regulated as a device, we will be subject to ongoing FDA obligations and continued regulatory oversight and review, including compliance with requirements such as the quality system regulation, or QSR, which establishes extensive requirements for quality assurance and control as well as manufacturing procedures; the listing of our devices with the FDA; adverse event and malfunction reporting; corrections and removals reporting; and labeling and promotional requirements. We may also be subject to additional FDA post-marketing obligations. If we are not able to maintain regulatory compliance, we may not be permitted to offer our cloud-based software and may be subject to enforcement action by the FDA, such as the issuance of warning or untitled letters, fines, injunctions and civil penalties; recall or seizure of products; operating restrictions and criminal prosecution. In addition, if a test developed by any of our partners using our cloud-based distribution model in the United States is found not to be an LDT, the partner may not be able to market its test, and we would not receive the revenues anticipated from that partner.

        Our cloud-based distribution model relies on the adoption by clinical laboratories in the United States and around the world of our cloud-based solutions, whereby the laboratory would run its own NIPT molecular testing assays based on our technology or other molecular testing assays in its own facilities and then access our proprietary algorithms through the cloud for the analysis of the assay results. However, we do not know whether clinical laboratories will adopt this method of using our products and services in sufficient volume or at all. As of June 20, 2015, we have signed agreements with only 11 partners under our cloud-based distribution model and only one partner has begun commercializing products using this model. In the diagnostics industry, the market for cloud-based solutions and services is not as mature as the market for on-premise enterprise software, and it is uncertain how quickly and to what extent our cloud-based distribution model will achieve and sustain high levels of customer demand and market acceptance. The rate of adoption of our cloud-based distribution model will depend on a number of factors, including the cost, performance and perceived value associated with our solution, as well as our ability to address security, privacy and regulatory requirements or concerns. In addition, our cloud-based software will need to be compatible with whatever next-generation sequencing, or NGS, hardware a clinical laboratory is using. Because we do not control the manufacturing and specifications of the NGS equipment, some clinical laboratories may not be able to use this model.

        If we or other cloud-based solution providers experience security incidents, loss of customer data or disruptions in delivery or other problems, the market for cloud-based solutions in the diagnostics industry, including our solutions, may be adversely affected. Such events could also result in potential lawsuits and liability claims which could have a material adverse effect on our business. If there is a reduction in demand for cloud-based solutions caused by technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or other challenges, we may not be able to execute our planned business model, and our results of operations may be adversely affected.

If the FDA requires us to obtain regulatory clearance to market our software for diagnostic purposes and we do not receive such clearance, or comply with ongoing FDA regulatory requirements, we would be unable to commercialize our cloud-based distribution model or be subject to regulatory action.

        We utilize software to aid in the calculation of test data. Laboratories utilizing our technology may have access to this software in our cloud-based distribution model. It is possible that we will need to obtain regulatory clearance for our software in order for it to be used by third parties in the conduct of their

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diagnostic tests based on our technology. We are currently engaged in discussions with the FDA regarding the regulatory status of our software to make calls of copy number variants, which could be used to support our cloud-based distribution model for NIPT in the United States. The FDA has recently indicated to us that this software may be appropriate for review under the de novo classification process. However, the FDA has not committed to this position and may take a different position in the future. The FDA has stated to us that it will not prevent us from marketing the software in the United States while we continue to discuss with the FDA how our software will be regulated and the FDA determines the regulatory pathway; however, it is possible that the FDA may reverse itself on the issue of our ability to continue to market the software during our discussions. The FDA's decision about the appropriate pathway could also be impacted by its plans to regulate LDTs, as outlined in the October 3, 2014 draft guidances described in "Business—Government Regulations." If necessary, we intend to seek regulatory clearance for our software for diagnostic purposes; however, we cannot guarantee that we will obtain clearance. If clearance is required and we are unable to obtain it, we would be unable to commercialize our cloud-based distribution model in the United States.

        If our software is regulated as a device, we will be subject to ongoing FDA obligations and continued regulatory oversight and review, including routine inspections by the FDA of any manufacturing facility and compliance with requirements such as the QSR; requirements pertaining to the registration of any manufacturing facility and the listing of our device with the FDA; adverse event and malfunction reporting; corrections and removals reporting and labeling and promotional requirements. If we are not able to maintain regulatory compliance, we may not be permitted to make our software available and/or may be subject to enforcement by the FDA such as the issuance of warning or untitled letters, fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions and criminal prosecution.

Implementation of our cloud-based distribution model may negatively impact our financial results and results of operations.

        Currently, all blood samples that are necessary to perform our tests, except for our non-invasive prenatal paternity test and most of our carrier screening testing, are sent to our laboratory in San Carlos, California for analysis. Our laboratory is certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA. In our laboratory, we perform both the molecular biology and bioinformatics analysis on the samples to produce the results for our tests. As our laboratory partners adopt our cloud-based distribution model whereby outside laboratories perform the molecular biology analysis and we offer our bioinformatics analysis in the cloud on a portion of the tests we sell, we will no longer process these tests in our laboratory. We expect to receive license fees or similar payments for use of our bioinformatics technology, but the revenues per test would be lower than the amount we receive when we perform the entire test ourselves. If the cloud-based distribution model does not lead to a sufficient increase in volume of tests sold to offset the lower revenues per test, our overall revenues will be lower, and our results of operations may be adversely affected.

We anticipate relying on third-party data centers to host our cloud-based software, and any interruptions of service or failures may impair the delivery of our cloud-based software and harm our business.

        We currently provide and will continue to provide our cloud-based software to our laboratory partners through third-party data center hosting facilities located in the United States and other countries. Any technical problems that may arise in connection with the third-party data center hosting facilities could result in interruptions in our service. These types of problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. Interruptions in our service may reduce our revenue, cause us to issue refunds, cause laboratory partners to terminate their contracts with us and adversely affect our ability to attract new laboratory partners. We could also be exposed to potential lawsuits and liability claims. Our business will also be harmed if our laboratory partners and potential laboratory partners believe our service is unreliable.

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

        Our success depends on the market's confidence that we can provide reliable, high-quality genetic testing results. There is no guarantee that the accuracy and reproducibility we have demonstrated to date will continue as our test volume increases. We believe that our customers are likely to be particularly sensitive to test limitations and errors, including inaccurate test results and the need on occasion to perform second blood draws on patients. As a result, if our tests do not perform as expected, our operating results, reputation, and business will suffer. We may be subject to legal claims arising from such limitations, errors, or inaccuracies.

        Panorama and our other products use a number of complex and sophisticated biochemical and bioinformatics processes, many of which are highly sensitive to external factors. An operational or technology failure in one of these complex processes or fluctuations in external variables may result in sensitivity and specificity rates that are lower than we anticipate or that vary between test runs or in a higher than anticipated number of tests which fail to produce results. In addition, we regularly evaluate and refine our testing process. These refinements may initially result in unanticipated issues that may reduce our sensitivity and specificity rates.

We expect to rely on third party laboratories to perform some of our testing.

        We currently send out a portion of our Horizon carrier screening testing to third-party laboratories. We intend to send out an increasing portion of such testing to third-party laboratories. These third-party laboratories are subject to contractual obligations to perform this testing for us but are not otherwise under our control. We, therefore, do not control the capacity and quality control efforts of these third-party laboratories other than through our ability to enforce contractual obligations on volume and quality systems. In the event of any adverse developments with these third-party laboratories or their ability to perform this testing in accordance with the standards that we and our customers expect, our ability to provide our Horizon test to customers may be delayed or interrupted. While we expect to have two separate third-party laboratories performing this testing in order to avoid single sourcing, we do not have the ability to perform the entire test that we will market to customers ourselves, so we currently do not have a backup if either or both third-party laboratories are unable to satisfy our demand for this testing. Any natural or other disaster, acts of war or terrorism, shipping embargoes, labor unrest or political instability or similar events at our third-party laboratories' facilities that causes a loss of testing capacity would heighten the risks that we face. Changes to or termination of our agreements or inability to renew our agreements with these parties or enter into new agreements with other laboratories that are able to perform such testing could impair, delay or suspend our efforts to market and commercialize Horizon. Because we cannot ensure these third-party laboratories' actual performance of this testing, the quality of such performance, or the ability of these third-party laboratories to comply with applicable legal and regulatory requirements, we may be subject to significant delays caused by interruption in performance or to lost revenue from such interruption. Such interruption could lead to the loss of customers through harm to our reputation, and we may be unable to regain those customers in the future. In addition, certain third party payers that we are under contract with may take the position that sending out this testing to third-party laboratories is contrary to the terms of our contract and may refuse to pay us for testing that we have outsourced. If any of these events occur, our business, financial condition and results of operations could suffer. We and our subsidiaries have begun billing and outsourcing the portions of testing that we do not perform in-house to third-party CLIA laboratories. Some state laws impose anti-markup restrictions that prevent an entity from realizing a profit margin on outsourced testing. Whether we or our subsidiaries will be able to realize a profit margin on outsourced testing will be determined by the application of those state laws. If we or our subsidiaries are unable to markup outsourced testing, our revenues and operating margins would suffer.

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If we are unable to successfully grow revenues for our products in addition to Panorama, our business and results of operations may be adversely affected.

        Our ability to successfully grow revenues for our products in addition to Panorama, such as Horizon, Spectrum, Anora and our non-invasive prenatal paternity testing products, is uncertain and is subject to risks, including that the adoption and demand for such products may not grow as we expect, we may not be able to demonstrate that our products are equivalent to or superior to competing products, we and our laboratory partners may not be able to maintain and grow effective sales and marketing capabilities, our laboratory partners may choose to more actively or exclusively market tests by competitors, we may experience supply constraints, and we may fail to adequately protect our intellectual property relating to our products or others may claim we infringe their intellectual property rights. If we are not able to increase adoption of and grow revenues for these products, our business and results of operations may be adversely affected.

We depend on certain of our laboratory partners to accurately and timely report financial information to us.

        In some cases we depend upon our laboratory partners to report the number of tests that we perform and that are purchased and billed by them, or license fees owed to us for testing that they perform in which they have used our intellectual property. Accurate and timely reporting of this information to us is required in order for us to report our revenue in an accurate and timely manner as our agreements with these laboratory partners require them to pay us a fee based on the number of our tests purchased by them, or the number of tests that they perform using our intellectual property for which they owe us a license fee. If our laboratory partners do not accurately and timely report such information to us, the reporting of our financial results may be inaccurate or delayed.

If the results of our clinical studies do not support the use of our tests, particularly in the average-risk pregnancy population, or cannot be replicated in later studies required for regulatory approvals or clearances, our business, financial condition, results of operations and reputation could be adversely affected.

        As the healthcare reimbursement system in the United States evolves to place greater emphasis on comparative effectiveness and outcomes data, we cannot predict whether we will have sufficient data, or whether the data we have will be presented to the satisfaction of any payers seeking such data in the process of determining coverage for our tests, particularly in the average-risk pregnancy population for which such data is expected to be of particular interest.

        The administration of clinical and economic utility studies is expensive and demands significant attention from certain members of our management team. Data collected from these studies may not be positive or consistent with our existing data, or may not be statistically significant or compelling to the medical community. If the results obtained from our ongoing or future studies are inconsistent with certain results obtained from our previous studies, adoption of Panorama would suffer and our business would be harmed.

        Peer-reviewed publications regarding our tests may be limited by many factors, including delays in the completion of, poor design of, or lack of compelling data from clinical studies, as well as delays in the review, acceptance and publication process. If our tests or the technology underlying our current tests or future tests do not receive sufficient favorable exposure in peer-reviewed publications, the rate of clinician adoption of our tests and positive reimbursement coverage decisions for our tests could be negatively affected. The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for tests such as our tests, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any test that is the subject of a study.

        In addition, test development, including development of the data necessary to obtain clearance and approval, is time consuming and carries with it the risk of not yielding the desired results. The performance

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achieved in published studies may not be repeated in later studies that may be required to obtain either FDA premarket clearance or approval should we decide for business or regulatory reasons to submit any 510(k) premarket notifications or premarket approval, or PMA, applications to the FDA. Limited results from earlier-stage verification studies may not predict results from studies in larger numbers of subjects drawn from more diverse populations over a longer period of time. Unfavorable results from ongoing preclinical and clinical studies could result in delays, modifications or abandonment of ongoing analytical or future clinical studies, or abandonment of a product development program, or may delay, limit or prevent regulatory approvals or clearances or commercialization of our product candidates.

If our sole laboratory facility becomes inoperable, we will be unable to perform our tests and our business will be harmed.

        We do not have redundant laboratory facilities, other than third-party laboratories that we employ to perform some of our Horizon carrier screen testing, and our San Carlos, California laboratory facility is situated near active earthquake fault lines. Our facilities may be harmed or rendered inoperable (or samples could be damaged or destroyed) by natural or manmade disasters, including earthquakes, flooding, power outages and contamination, which may render it difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog of tests that could develop if our facility is inoperable for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future.

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

        We have sourced and will continue to source components of our technology, including sequencers, reagents, tubes and other laboratory materials, from third parties. Our sequencers, certain reagents and blood collection tubes are sole sourced. Our failure to maintain continued supply of such components, or supply that meets quality control requirements, particularly in the case of sole suppliers, would seriously harm our business, financial condition, and results of operations. In the event of any adverse developments with these vendors, our product supply may be interrupted, and obtaining substitute components could be difficult or require us to re-design our products or, for any products for which we may obtain approval from the FDA, obtain approval from the FDA to use a new supplier, which would have an adverse impact on our business. Any natural or other disaster, acts of war or terrorism, shipping embargoes, labor unrest or political instability or similar events at our third-party manufacturers' facilities that causes a loss of manufacturing capacity would heighten the risks that we face. Changes to or termination of our agreements or inability to renew our agreements with these parties or enter into new agreements with other suppliers could result in the loss of access to important components of our tests and could impair, delay or suspend our commercialization efforts, including efforts to market and commercialize Panorama. Because we rely on third-party manufacturers, we do not control the manufacture of these components, including whether such components will meet quality control requirements. If the supply of components we receive do not meet quality control standards, we may not be able to use the components, or if we use them not knowing that they are of inadequate quality, which recently occurred with respect to a reagent leading to inconclusive readings requiring blood redraws, it may prevent our tests from working properly or at all. Because we cannot ensure the actual production or manufacture of such critical equipment and materials, or the quality of such components, or the ability of our suppliers to comply with applicable legal and regulatory requirements, we may be subject to significant delays caused by interruption in production or manufacturing or to lost revenue from such interruption or from spoiled tests.

        One of these third parties, Illumina, is currently the sole supplier of our sequencers and related reagents for Panorama, along with certain hardware and software, pursuant to a supply agreement that expires in August 2016. Without sequencers and the related reagents, we would be unable to run our tests and commercialize our products. In early 2013, prior to our entering into our agreement with Illumina,

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Illumina completed its acquisition of Verinata Health Inc., our direct competitor in the NIPT market. We understand Illumina supplies the same or similar sequencers and consumables to Verinata. Because of Illumina's acquisition of Verinata, we face increased risk and uncertainty regarding continuity of a successful working relationship with Illumina under the current supply agreement, including with respect to our ability to compete with Verinata in the marketplace based on test price and in view of economic advantages enjoyed by Verinata associated with the cost of sequencers and related consumables. We also face risk and uncertainty regarding our ability to renew the supply agreement at all or on financial terms that are attractive or acceptable to us. Our failure to maintain continued supply of the sequencers and reagents, along with the right to use certain hardware and software, would adversely impact our business, financial condition, and results of operations. While we are continuing to evaluate alternative sequencing platforms for Panorama, we have chosen not to productize our tests on these alternative platforms as they are not as well proven as Illumina's sequencers and Illumina has thus far provided us more favorable commercial terms. In the event that it is in our commercial interest or we are forced to transition sequencing platforms, we may not be successful in selecting, acquiring on commercially reasonable terms, and implementing an alternative platform that is satisfactory for our needs or that we can employ in a commercially sustainable way. The sole supplier of the blood collection tubes included in Panorama and our non-invasive prenatal paternity testing products in the United States is Streck, Inc. Transitioning to a new supplier from any of our sole suppliers could be time consuming and expensive, may result in interruptions in our ability to supply our products to the market, could affect the performance specifications of our tests or could require that we re-validate Panorama and our other tests using replacement equipment and supplies, which could delay the performance of our tests and result in increased costs. Any disruptions to our laboratory performance and ability to deliver our products could adversely affect our business, financial condition, results of operations and reputation. In addition, if we were to obtain a PMA for Panorama, either on our own volition as we are currently in discussions with the FDA regarding a potential PMA for Panorama, or as required by FDA if and when it finalizes the draft LDT guidances, and we subsequently need to modify Panorama because of issues with suppliers described above, the FDA could require us to obtain a PMA supplement prior to making the change.

We rely on commercial courier delivery services to transport samples to our laboratory facility in a timely and cost-efficient manner and if these delivery services are disrupted, our business will be harmed.

        Our business depends on our ability to quickly and reliably deliver test results to our customers. Blood samples are typically received within days from the United States and outside the United States for analysis at our San Carlos, California facility. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, terrorist acts or threats or for other reasons could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.

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

        In the ordinary course of our business, we collect and store sensitive data, including legally-protected health information, credit card information, and personally identifiable information, such as Panorama results. We also store sensitive intellectual property and other proprietary business information, including that of our customers, payers and collaboration partners. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based data center systems. These applications and data encompass a wide variety of business critical information, including research and development information, commercial information and business and financial information. We are highly dependent on information technology networks and systems, including the Internet, to securely process, transmit, and store this critical information. Although we take measures to protect

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sensitive information from unauthorized access or disclosure, our information technology and infrastructure, and that of our third-party billing and collections provider, may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other disruptions.

        A security breach or privacy violation that leads to disclosure or modification of or prevents access to patient information, including personally identifiable information or protected health information, could harm our reputation, compel us to comply with state breach notification laws, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures, our operations could be disrupted, and we may suffer loss of reputation, financial loss, and other regulatory penalties because of lost or misappropriated information, including sensitive patient data. In addition, these breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above.

        Any such breach or interruption could compromise our data security, and the information we store could be inaccessible or could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such interruption in access, improper access, disclosure, modification of, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to perform tests, provide test results, bill payers or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, develop and commercialize tests, collect, process and prepare company financial information, provide information about our tests, educate patients and clinicians about our service, and manage the administrative aspects of our business, any of which could damage our reputation and adversely affect our business. Any such breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our competitive position.

        The cloud-based distribution model that we have released and are expanding adds some additional data privacy risk, as certain personal health and other information may be sent to and stored in the cloud by our partners. We have contractually obligated our partners to not send personally-identifiable information to our cloud servers, and we have an agreement with the vendor that hosts our software in the cloud to comply with data privacy laws, such as HIPAA. However, we cannot be certain that our partners will comply with these requirements or that our cloud vendor will comply with the terms of our agreement.

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

The marketing, sale, and use of Panorama and our other products could result in substantial damages arising from product liability or professional liability claims that exceed our resources.

        The marketing, sale and use of Panorama and our other products could lead to product liability claims against us if someone were to allege that our test failed to perform as it was designed, or if someone were to misinterpret test results. In addition, we may be subject to liability for errors in, a misunderstanding of, or inappropriate reliance upon, the information we provide as part of the results generated by Panorama and our other products. For example, Panorama could provide a low-risk result which a patient or physician may rely upon to make a conclusion about the health of the fetus, which may, in fact, have the

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condition because the Panorama result was a so-called false negative. If the resulting baby is born with the condition, the family may file a lawsuit against us claiming product or professional liability. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend. Although we maintain product and professional liability insurance, our insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims or any judgments, fines or settlement costs arising out of any such claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could harm our reputation, result in a cessation of our services or cause our partners to terminate existing agreements and potential partners to seek other partners, any of which could adversely impact our results of operations.

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

        As our test volumes grow, we will need to continue to ramp up our testing capacity, implement increases in scale and related processing, customer service, billing and systems process improvements and expand our internal quality assurance program and technology platform to support testing on a larger scale. We will also need additional equipment, laboratory space and certified laboratory personnel to process higher volumes of our tests. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that equipment, laboratory space and appropriate personnel will be available. As additional tests are developed, we may need to bring new equipment on-line, implement new systems, technology, controls and procedures, and hire personnel with different qualifications.

        The value of Panorama and our other products depends, in part, on our ability to perform the tests on a timely basis and at an exceptionally high quality standard, and on our reputation for such timeliness and quality. Failure to implement necessary procedures, transition to new equipment or processes or to hire the necessary personnel could result in higher costs of processing or an inability to meet market demand. There can be no assurance that we will be able to perform tests on a timely basis at a level consistent with demand, our efforts to scale our commercial operations will not negatively affect the quality of test results, or we will be successful in responding to the growing complexity of our testing operations.

        In addition, our growth may place a significant strain on our management, operating and financial systems and our sales, marketing and administrative resources. As a result of our growth, our operating costs may escalate even faster than planned, and some of our internal systems may need to be enhanced or replaced. If we cannot effectively manage our expanding operations and our costs, we may not be able to grow successfully or we may grow at a slower pace, and our business could be adversely affected.

Our business is susceptible to costs and risks associated with international operations.

        As part of our ongoing growth strategy, we intend to continue to expand within and target select international markets to grow our revenues outside the United States. Conducting international operations subjects us to risks, including:

    uncertain or changing laws, regulatory registration and approval processes associated with Panorama and other current products and future products;

    uncertain reimbursement by third party payers;

    competition from companies located in the countries in which we offer our tests, and in which we may be at a competitive disadvantage because the country may favor a local provider or for other reasons;

    longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

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    lower margins due to lower pricing in many countries;

    difficulties in managing and staffing international operations and assuring compliance with foreign corrupt practices and other regulations and laws;

    potentially adverse tax consequences, including the complexities of foreign value added tax systems, tax inefficiencies related to our corporate structure and restrictions on the repatriation of earnings;

    increases in financial accounting and reporting burdens and complexities;

    the imposition of trade barriers such as tariffs, quotas, preferential bidding or import or export licensing requirements;

    compliance with U.S. laws, such as the Foreign Corrupt Practices Act;

    political, social and economic instability abroad;

    terrorist attacks and security concerns;

    fluctuations in currency exchange rates; and

    reduced or varied protection for intellectual property rights.

        These risks, if realized, could harm our business or results of operations. Additionally, operating internationally requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to increase international revenues or expand or establish operations in other countries will produce desired levels of revenues or profitability.

        Outside the United States we enlist partners and local and regional laboratories to assist with blood draw, sales, marketing and customer support. Subject to regulatory clearance, where required, we have begun to contract with international partners to run the molecular portion of our tests in their own labs and then access our algorithm for analysis of the resulting data via our cloud-based distribution model. Locating, qualifying and engaging additional partners and local laboratories with local industry experience and knowledge will be necessary to effectively market and sell our tests outside the United States. We may not be successful in finding, attracting and retaining such partners or laboratories, or we may not be able to enter into such arrangements on favorable terms. Sales practices utilized by our partners that are locally acceptable may not comply with sales practices standards required under United States laws that apply to us, which could create additional compliance risk. Even if we are able to effectively manage our international operations, if our partners and local and regional laboratories are unable to effectively manage their businesses, our business and results of operations could be adversely affected. If our sales and marketing efforts are not successful outside the United States, we may not achieve market acceptance for our tests outside the United States, which would harm our business.

If we lose the services of our founder and Chief Executive Officer or other members of our senior management team, we may not be able to execute our business strategy.

        Our success depends in large part upon the continued service of our senior management team. In particular, our founder and Chief Executive Officer, Matthew Rabinowitz, is critical to our vision, strategic direction, culture, products and technology. Although Dr. Rabinowitz spends significant time with us and is highly active in our management, he has the ability to spend up to one business day per week on prior commitments pursuant to his employment agreement. In addition, we do not maintain key-man insurance for Dr. Rabinowitz or any other member of our senior management team. The loss of our founder and Chief Executive Officer or one or more other members of our senior management team could have an adverse effect on our business.

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An inability to attract and retain highly skilled employees could adversely affect our business.

        To execute our growth plan, we must attract and retain highly qualified personnel. In the near term, we plan on hiring a substantial number of additional domestic sales specialists. Competition for these personnel is intense, especially for sales, scientific, medical, laboratory and technical personnel and especially in the San Francisco Bay Area where our headquarters and laboratory facilities are located. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations to their former employees, resulting in a diversion of our time and resources. In addition, job candidates and existing employees in the San Francisco Bay Area often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

We may engage in acquisitions that could disrupt our business, cause dilution to our stockholders or reduce our financial resources.

        In the future, we may enter into transactions to acquire other businesses, products or technologies. Because we have not made any acquisitions to date, our ability to do so successfully is unproven. If we identify suitable candidates, we may not be able to make such acquisitions on favorable terms or at all. Any acquisitions we make may not strengthen our competitive position, and these transactions may be viewed negatively by customers or investors. We may decide to incur debt in connection with an acquisition or issue our common stock or other equity securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders. We could incur losses resulting from undiscovered liabilities of the acquired business that are not covered by any indemnification we may obtain from the seller. In addition, we may not be able to successfully integrate the acquired personnel, technologies and operations into our existing business in an effective, timely and non-disruptive manner. Acquisitions may also divert management attention from day-to-day responsibilities, increase our expenses and reduce our cash available for operations and other uses. We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our operating results.

We may need to raise additional capital after this offering, and if we cannot raise additional capital when needed, we may have to curtail or cease operations.

        The proceeds of this offering may not be sufficient to fully fund our business and growth strategy. We may need to raise additional funds through public or private equity or debt financings, corporate collaborations or licensing arrangements to continue to fund or expand our operations.

        Our actual liquidity and capital funding requirements will depend on numerous factors, including:

    our ability to achieve broader commercialization of Panorama;

    the success of our research, development, and commercialization efforts for potential new products, including in the field of cancer;

    our ability to obtain more extensive coverage and reimbursement for our tests, including in the average-risk patient population;

    the costs and success of our introduction of a cloud-based distribution model;

    our ability to collect our accounts receivable;

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    the costs and success of further expansion of our sales and marketing activities and research and development activities;

    the degree to which we require additional sales, marketing and reimbursement personnel;

    our need to finance capital expenditures and further expand our clinical laboratory operations;

    our general and administrative expenses; and

    the timing and results of any regulatory authorizations that we are required to obtain for our tests.

        Additional capital, if needed, may not be available on satisfactory terms or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities will dilute stockholders' ownership interests in us and may have an adverse effect on the price of our common stock. In addition, the terms of any financing may adversely affect stockholders' holdings or rights. Debt financing, if available, may include restrictive covenants. To the extent that we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish some rights to our technologies or grant licenses on terms that may not be favorable to us.

        If we are not able to obtain adequate funding when needed, we may have to delay development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more of our tests or market development programs, which could lower the economic value of those programs to our company.

Our outstanding debt may impair our financial and operating flexibility.

        As of December 31, 2014 and March 31, 2015, we had approximately $25.9 million and $25.3 million of debt outstanding. Except for operating leases, we do not have any off-balance sheet financing arrangements in place or available. Our debt agreements contain various restrictive covenants and are secured by all of our assets, including our intellectual property. These restrictions could limit our ability to use operating cash flow in other areas of our business because we must use a portion of these funds to make principal and interest payments on our debt.

        We may incur additional indebtedness in the future. Our ability to make principal and interest payments will depend on our ability to generate cash in the future. If we incur additional debt, a greater portion of our cash flows may be needed to satisfy our debt service obligations, and if we do not generate sufficient cash to meet our debt service requirements, we may need to seek additional financing. In that case, it may be more difficult, or we may be unable, to obtain financing on terms that are acceptable to us. As a result, we would be more vulnerable to general adverse economic, industry and capital markets conditions as well as the other risks associated with having indebtedness.

Ethical, legal and social concerns related to the use of genetic information could reduce demand for our tests.

        DNA testing, like that conducted using Panorama and that we expect to conduct in the field of cancer, has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, limit or regulate the use of genomic information or genomic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead patients to refuse to use genetic tests even if permissible. Ethical and social concerns may also influence U.S. and foreign patent offices and courts with regard to patent protection for technology relevant to our business. These and other ethical, legal and social concerns may limit market acceptance of our tests or reduce the potential markets for services and products enabled by our technology platform, either of which could harm our business.

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

        We are subject to the Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance on independent laboratories to sell Panorama and other products internationally demands a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with foreign government officials. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom's Bribery Act of 2010, which went into effect in 2011, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

        Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation's ability to use its pre-change net operating loss, or NOL, carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. As a result of our most recent private placements of equity securities and other transactions that have occurred over the past three years, we may have experienced an "ownership change," or, upon the closing of this offering, may experience an "ownership change." We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership (some of which may not be in our control). As of December 31, 2014, we had federal and state NOLs carryforwards of approximately $57.9 million and $40.8 million, respectively, which begin to expire in 2027 and 2017, respectively, if not utilized. We also had federal research and development credit carryforwards of approximately $2.5 million, which begin to expire in 2027, and state research and development credit carryforwards of approximately $2.0 million, all of which could be limited if we experience "ownership changes."

Reimbursement and Regulatory Risks Related to Our Business

If we are unable to expand third-party payer coverage and reimbursement for Panorama and our other tests, if third-party payers withdraw coverage or provide lower levels of reimbursement due to changing policies, billing complexities or other factors, or if we are required to refund any reimbursements already received, our revenues and results of operations would be adversely affected.

        Our business depends on our ability to obtain or maintain adequate reimbursement coverage from third-party payers and patients. Third-party reimbursement for our testing represents a significant portion of our revenues, and we expect third-party payers such as insurance companies and government healthcare programs to continue to be our most significant source of payments going forward. In particular, we believe that expanding insurance coverage from the high-risk to the average-risk pregnancy population, which represents roughly 80% of the United States pregnancy market, and obtaining a positive coverage decision and favorable reimbursement rates from commercial third-party payers and the Centers for Medicare & Medicaid Services, or CMS, and state reimbursement programs for Panorama will be a necessary element in achieving commercial success. If we are unable to obtain or maintain adequate

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reimbursement coverage from third-party payers for our existing tests or future tests, our ability to generate revenues would be limited. For example, physicians may be reluctant to order the use of our tests due to the substantial potential cost to the patient if reimbursement coverage is unavailable or reimbursement amounts are inadequate. Our laboratory partners in the United States will likely decline to market our tests without positive reimbursement decisions from third party payers. Additionally, in some instances we may not receive positive coverage determinations when we seek third-party payer reimbursement approvals.

        The reimbursement environment, particularly for molecular diagnostics, is changing and our efforts to broaden reimbursement for our tests with third-party payers may not be successful as standards evolve. Third-party payers from whom we have received reimbursement may withdraw coverage or decrease the amount of reimbursement coverage for our tests at any time and for any reason, or we may be required to refund reimbursements already received. As a result, there is significant uncertainty about whether the use of tests, such as Panorama, expanded carriers screening panels, screening for microdeletions, or cell free tumor DNA tests, will be eligible for coverage. There is also a question of whether reimbursement will become available for the average-risk pregnancy population, by third-party payers or, if eligible for coverage, what the reimbursement rates will be for those services and tests.

        In making coverage determinations, third-party payers often rely on practice guidelines issued by professional societies. The International Society for Prenatal Diagnosis, or ISPD, has issued guidelines and the American College of Medical Genetics, or ACMG, has issued a statement that are supportive of NIPT in average-risk pregnancies, as well as high-risk pregnancies. The American College of Obstetricians and Gynecologists, or ACOG, and the Society for Maternal Fetal Medicine, or SMFM, issued new guidelines for NIPT on June 26, 2015, stating that conventional screening methods, rather than NIPT, remain the most appropriate choice for first-line screening for average-risk pregnancies because of the performance of conventional screening methods, the limitations of NIPT performance, and the limited data on cost effectiveness in the average-risk obstetric population, although the guidelines also stated that all women should be informed of NIPT, among other options, including the option of no testing, and any woman may choose NIPT as a screening strategy, regardless of her risk status. The statement that any woman may choose NIPT as a screening strategy, regardless of risk status, is a change from ACOG's prior guidelines on NIPT, which limited NIPT to high risk pregnancies which constituted only roughly 20% of the market. The new guidelines also echoed a previous statement from SMFM that routine screening for microdeletions should not be performed, since screening for microdeletions has not been validated in clinical studies, and the sensitivity and specificity of this screening test is uncertain. While we expect that, based on the new ACOG and SMFM guidelines, more average-risk women will be informed of NIPT and may request it, it is uncertain whether third-party payers will reimburse for NIPT for these patients. Further, while we have collected and expect to soon publish data on the performance of Panorama for the 22q11.2 deletion syndrome, ACOG and SMFM's advising against screening for microdeletions may have a negative impact on third-party payers' reimbursement for Panorama for microdeletions, at least until convincing validation data on the sensitivity and specificity of our tests becomes available. If third-party payers do not reimburse for NIPT for average-risk pregnancies or microdeletions in the future, our future revenues and results of operations would be adversely affected.

        Our strategy to achieve broad third-party coverage is focused on demonstrating the clinical utility and economic benefits of Panorama, including screening for microdeletions, and our other tests, engaging with key members of the MFM and OB/GYN community and educating clinicians, but there is no assurance that we will succeed in any of these areas or that, even if we do succeed, we will receive favorable coverage and reimbursement decisions. In some cases, our tests or their uses with certain populations may be considered experimental by third-party payers and, as a result, such payers may decide not to reimburse for such tests. Currently, most third-party payers have negative coverage determinations for average-risk patient populations, meaning that their policy is not to reimburse for NIPT for patients in the average-risk population. In addition, third party payers may decide to bundle payment for multiple tests, such as carrier

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screen tests or our Panorama test and the separate Panorama screen for microdeletions into a single payment rate. Third-party payers may also decide to deny payment or recoup payment for testing that they determine to have been not medically necessary or otherwise against their coverage determinations. The risk of recoupment is higher when we are under contract, or in network, with a payer, and that payer has negative coverage determinations for aspects of our tests, for example NIPT for average-risk pregnancies or for the screening of microdeletions. For example, one third-party payer has recently requested repayment by us of $1.88 million, which it alleges was an overpayment reflecting the difference between what it paid to us and what it now contends it should have paid based on its fee schedule and coverage determinations. We disagree with its contentions and are in active discussions with this payer to resolve its concerns. To the extent that third-party payers may deny payment or recoup payment for testing that they determine to have been not medically necessary or otherwise against their coverage determinations, reimbursement revenue for our testing could decline. If we are not able to properly manage compliance with the contractual requirements of third-party payers, our revenues could be adversely affected by claims for refunds. These claims could also serve as a distraction for our management away from development of our business.

        If adequate third-party reimbursement is unavailable, we may not be able to maintain price levels sufficient to realize an appropriate return on investment in test development and sales and marketing activities. Furthermore, if a third-party payer denies coverage, it may be difficult for us to collect from the patient, and we may not be successful in doing so. It is our policy not to grant reduced payment terms to patients covered by a government payer or where otherwise prohibited by law. If we are in-network with a payer, we bill patients for their full contractual responsibility and make a good faith attempt to collect. When we are an out-of-network provider, it is our policy to bill patients for their full responsibility according to the payer's explanation of benefits and to send multiple bills if they are unpaid. However, we are often not able to collect the full patient responsibility in these out-of-network situations, particularly if the patient is left with a large balance. Where a patient contacts us contesting her bill, or claiming she is not able to pay her full balance, we have been willing to negotiate with the patient for payment of less than the full patient responsibility, and in some cases considerably less, based on what the patient can pay or if the patient was able to make payment promptly. We also permit patients to pay their outstanding balance over time pursuant to a payment plan. Because it is not cost-effective and would be detrimental to customer relations, we typically have not enforced collections from patients through a collection agency, but this is not a formal policy, and we reserve the right to do so. As a result of these policies and approaches, we generally collect a smaller amount for our tests when third-party payers deny coverage or cover only a portion of the invoiced amount.

        We are aware of policies and practices of our competitors, including privately-funded and publicly-funded companies, to offer patients a set cap on their out-of-pocket responsibility, waive patient responsibility altogether, and, in some cases, to not send patients a bill at all, all of which we believe is not in accordance with third party payers' policies and, in some cases, not compliant with the law. In contrast, it is our policy not to offer such caps or waivers and to send multiple bills to patients. Because of this discrepancy, our offerings may be perceived as less attractive to patients and their healthcare providers, who are concerned about patients having a large financial responsibility for these products. As a result, we believe that our revenues and results of operations have been adversely affected, and may continue to be so affected to the extent such competitors continue such practices.

        We have sought to train our sales representatives to appropriately communicate that we do not routinely waive or place a cap on patient responsibility. When we are made aware of a miscommunication of our policy, we take steps to correct the miscommunication and provide additional training to the sales representative. However, our recent rapid growth has placed strains on our ability to adequately train personnel and monitor compliance with our policies and procedures. As a result, and because of attendant confusion caused by others in the industry explicitly offering waivers and caps, some of our sales representatives may have miscommunicated our policy or their communication of our policy of providing

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discounts for paying promptly may have been misinterpreted by healthcare providers and patients as a routine waiver or cap on the patients' responsibility for their bills. We have received three inquiries from non-governmental third-party payers questioning the sufficiency of our efforts to collect payments from patients for the balance of their bills not covered by the payer. We are in discussions with all three of these payers to address their concerns. We believe that our billing policies, where we do offer discounts, and collection practices do not violate applicable laws or our obligations to these payers. Nonetheless, the aforementioned payer that claimed an overpayment reflecting the difference between what it has paid to us and what it now contends it should have paid based on its fee schedule and coverage determinations has also mentioned this issue. We disagree with its contentions and are contesting the payer's request. In an effort to clarify that we do not offer waivers or caps on patient obligations, we have recently updated and published our billing policy. In addition, we are continually expanding and strengthening our compliance program and the training of our sales representatives. The payers that have raised questions about our efforts may not be satisfied with our responses and past or current approaches to seeking payment from the patients. These payers may decide to reimburse for our tests at a lower amount or not at all and may seek repayment from us of amounts previously paid to us. If these consequences were to occur, or if other third-party payers raised similar concerns, our financial results could be negatively impacted and our stock price could decline. A third-party payer could bring a legal action seeking reimbursement of previous amounts paid if a payer believed such payments were made in breach of contract, in the case of contracted payers, or were otherwise contrary to law. If the payer were to be successful in proving such reimbursement was in breach of contract or otherwise contrary to law, we could have to make a cash payment, which could be significant, and we might be required to restate our financials from a prior period, which would likely have a negative impact on our stock price.

        If we are successful in entering into additional contractual arrangements with commercial third-party payers in the United States to provide Panorama to their covered patients, the amount of overall reimbursement we receive may decrease if, as we would expect, we are reimbursed less money per test at a contracted rate than at a non-contracted rate, which could have a negative impact on our revenue. We may also experience delays or be unable to contract with payers.

Our revenues may be adversely affected if we are unable to successfully obtain reimbursement from the Medicare Program.

        Our revenues from Medicare are currently very small, given the population that Medicare covers, and we do not expect those revenues to increase materially with regard to NIPT. However, Medicare reimbursement can affect Medicaid reimbursement. For example, fee-for-service Medicaid programs generally do not reimburse at rates that exceed Medicare's fee-for-service rates and many commercial third-party payers look to the amounts that Medicare pays for testing services and set their payment rates at a percentage of those amounts. Reimbursement amounts for laboratory tests furnished to Medicare beneficiaries are typically based on the Clinical Laboratory Fee Schedule, or CLFS, set by CMS pursuant to a statutory formula established by the U.S. Congress. Our current Medicare Part B reimbursement was not set pursuant to a national coverage determination by CMS. Although we believe that coverage is available under Medicare Part B even without such a determination, we currently lack the national coverage certainty afforded by a formal coverage determination by CMS. Thus, CMS could issue an adverse coverage decision as to Panorama which could influence other third-party payers, including Medicaid, and could therefore harm our business.

        Under Medicaid regulations, we must be recognized as a Medicaid provider by the state in which the Medicaid recipient receiving the services resides. As of March 31, 2015, we are recognized by 31 states as a Medicaid provider. We may not be able to be recognized as a provider by many Medicaid programs, including because some states require that a provider maintain a laboratory in that state in order to be recognized, which would limit our ability to bill for our services. In addition, we may face challenges in obtaining reimbursement even when we are recognized as a Medicaid provider. Thus, if the CLFS rate for

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our services and tests are low, the Medicaid reimbursement amounts will also likely be low. Low Medicaid reimbursement rates for our tests could harm our business and revenue.

Our revenues may be adversely impacted if third-party payers withdraw coverage or provide lower levels of reimbursement due to changing policies, billing complexities or other factors.

        Some third-party payers from whom we have received reimbursement to date have not entered into agreements with us to govern approval or payment terms. Therefore, such third-party payers could withdraw such coverage and reimbursement for our tests in the future for any reason. Managing reimbursement on a case-by-case basis is time consuming and contributes to an increase in the number of days it takes us to collect accounts receivable and increases our risk of non-payment. Negotiating reimbursement on a case-by-case basis also typically results in the provision of reimbursement at a significant discount to the list price of our tests.

        Further, even if we do have written agreements regarding reimbursement with certain third-party payers, those agreements are not guarantees of reimbursement coverage in an adequate amount. For example, third-party payers with which we have written agreements typically have policies that state they will not reimburse for use of NIPTs in the average-risk pregnancy population or for the screening of microdeletions. In addition, the terms of certain of our written arrangements may require us to seek pre-approval from the third-party payer or put in place other controls and procedures prior to conducting a test. To the extent we fail to follow these requirements, we may fail to receive some or all of the reimbursement payments to which we are entitled.

        Even if we are being reimbursed for our tests, third-party payers may review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our tests. Government healthcare programs and other third-party payers continue to increase their efforts to control the cost, utilization and delivery of healthcare services by demanding price discounts or rebates and limiting both coverage on diagnostic tests they will pay for and the amounts that they will pay for new molecular diagnostic tests. These measures have resulted in reduced payment rates and decreased utilization for the clinical laboratory industry. Because of the cost-containment trends, governmental and commercial third-party payers that currently provide reimbursement for, or may in the future cover, our tests may reduce, suspend, revoke or discontinue payments or coverage at any time. Reductions in the prices at which our tests are reimbursed may harm our business, financial condition or results of operations.

        Billing for clinical laboratory testing services is complex. In cases where we do not receive a fixed fee per test performed, we perform tests in advance of payment and without certainty as to the outcome of the billing process. In cases where we do expect to receive a fixed fee per test due to our reimbursement arrangements, we may have disputes over pricing and billing. Each third-party payer typically has different billing requirements, and the billing requirements of many payers have become increasingly stringent.

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

    disparity in coverage among various payers;

    disparity in information and billing requirements among payers; and

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

        These risks related to billing complexities, and the associated uncertainty in obtaining payment for our tests, could harm our business, financial condition and results of operations.

        In the United States, the American Medical Association, or AMA, generally assigns specific billing codes for laboratory tests under a coding system known as Current Procedure Terminology, or CPT, which we and our customers must use to bill and receive reimbursement for our diagnostic tests. Once the CPT

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code is established, CMS establishes payment levels and coverage rules under Medicare while private payers establish rates and coverage rules independently.

        We currently submit for reimbursement using CPT codes that we believe are appropriate for our testing, but there is a risk that these codes may be rejected or withdrawn or that payers will seek refunds of amounts that they claim were inappropriately billed to a specific CPT code. A new CPT code specific to NIPT came into effect in January 2015; however, not all payers may implement this code in a timely fashion, and reimbursement may be less than we have received in the past. We do not currently have specific CPT codes assigned for Panorama or microdeletions and there is a risk that we may not be able to obtain such codes, or if obtained, we may not be able to negotiate favorable rates for such codes, or be able to receive reimbursement for the average-risk NIPT patient population using such codes.

        We accordingly cannot guarantee that our current or any future tests will have a CPT code assigned. In addition, there can be no guarantees that government and commercial third-party payers will establish positive or adequate coverage policies for our tests or reimbursement rates for any CPT code we may use.

If the FDA were to begin actively regulating our tests as outlined in the FDA's October 3, 2014 draft guidances, we could incur substantial costs and delays associated with trying to obtain premarket clearance or approval and incur costs associated with complying with post-market controls.

        We currently offer a number of prenatal genetic tests, including Panorama, and each of those tests is an LDT. In addition, we currently anticipate initially commercializing our planned cancer tests as LDTs. An LDT has been generally considered to be a test that is designed, developed, validated and used within a single laboratory. The FDA takes the position that it has the authority to regulate such tests as medical devices under the Federal Food, Drug, and Cosmetic Act, or FDC Act, but it has generally exercised enforcement discretion with regard to LDTs. This means that even though the FDA believes it can impose regulatory requirements on LDTs, such as requirements to obtain premarket approval or clearance of LDTs, it has generally chosen not to enforce those requirements to date.

        On October 3, 2014, the FDA issued draft guidances outlining its plan to actively regulate LDTs using a risk-based approach. The FDA intends to fully regulate, in a phased-in manner, LDTs that it considers moderate-risk or high-risk, beginning with those within the high-risk category it considers "highest-risk devices." With regard to premarket review, under the proposed guidances, the highest-risk LDTs will be the subject of premarket submissions 12 months after the guidances are finalized. Premarket submission requirements will be phased-in over the following four years for the remaining high-risk LDTs. Then, beginning in year five, moderate-risk LDTs will be required to be the subject of premarket submissions.

        Based on our current understanding of the draft guidances, with the exception of our non-invasive prenatal paternity test, our current tests, including Panorama, would be treated as moderate-risk or high-risk. We do not expect that our current tests will be among the highest-risk devices. The FDA has indicated that high- and moderate-risk LDTs that are on the market if and when the draft guidances are finalized will remain on the market while the FDA reviews the submissions. We would not expect to be forced to remove any of our current products from the market based on any final guidance if we comply with the requirements outlined in such final guidance.

        The FDA's proposed framework in the draft guidances outlines post-market controls including registration and listing or FDA notification, corrections and removals reporting and adverse event reporting that will be required of all LDTs except those for forensic (law enforcement) use and certain LDTs for transplantation. For moderate- or high-risk tests, it also would require compliance with the QSR at the time the FDA clears a 510(k) for a test or the laboratory submits a PMA for a test. We would need to comply with these controls, which will be costly and time-consuming, and if we fail to comply we could be subject to enforcement action.

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        The regulation by the FDA of LDTs remains uncertain. It is unclear whether the FDA will finalize the guidances, when it will finalize the guidances, or whether any final guidances would be substantially revised from the draft versions. The comment period for the draft guidances closed February 2, 2015. The draft guidances have been the subject of considerable controversy and it is unclear whether the draft guidances will be finalized, and if so, what they will contain. In addition, Congress may act to provide further direction to the FDA on the regulation of LDTs.

        In the meantime, the FDA could also disagree with our assessment that our prenatal tests are LDTs, and could require us to seek clearance or approval to offer our tests for clinical use even before it finalizes any future guidance. If FDA premarket review or approval is required for our tests or any of our future tests we may develop, or if we decide to voluntarily pursue FDA review or approval, we may be forced to stop selling our tests or we may be required to modify claims or make other changes while we work to obtain FDA clearance or approval. Our business would be adversely affected while such review is ongoing and if we are ultimately unable to maintain premarket clearance or approval. For example, the regulatory 510(k) clearance or PMA process may involve, among other things, successfully completing analytical, pre-clinical and/or clinical studies beyond the studies we have already performed for each of our products and would involve submitting a premarket notification or filing a PMA application with the FDA. Performance achieved in published studies may not be repeated in later studies that would be required to obtain either FDA premarket clearance or approval. Limited results from earlier-stage verification studies, beyond the validation and other studies we have already performed for each of our products, may not predict results from studies in larger numbers of subjects drawn from more diverse populations over a longer period of time. Unfavorable results from ongoing preclinical and clinical studies could result in delays, modifications or abandonment of ongoing or future clinical studies, or abandonment of a product development program or may delay, limit or prevent regulatory approvals or commercialization. In addition, we may require cooperation in our filings for FDA approval from third-party manufacturers of the components of our tests. If required, and we are unable to obtain such cooperation, we may be unable to achieve desired regulatory clearances or approvals.

        Obtaining FDA clearance or approval for diagnostics can be time consuming and uncertain and requires detailed and comprehensive scientific and clinical data. If premarket review is required by the FDA or if we decide to voluntarily pursue FDA premarket review of our tests, including Panorama, for which we recently informed the FDA of our intent to actively pursue a PMA, there can be no assurance that our current tests or associated collection devices for any tests, or any tests we may develop in the future, will be cleared or approved on a timely basis, if at all. In addition, if a test has been approved through a PMA, certain changes that we may make to improve the test may need to be approved by the FDA before we can implement them, which could increase the time to roll such changes out to the commercial market. Ongoing compliance with FDA regulations would increase the cost of conducting our business and subject us to heightened regulation by the FDA and penalties for failure to comply with these requirements, both of which may adversely impact our business and results of operations.

        Furthermore, the FDA or the Federal Trade Commission may object to the materials and methods we used to promote the use of our current prenatal tests or other LDTs we may develop in the future. Enforcement actions by the FDA may include, among others, untitled or warning letters; fines; injunctions; civil or criminal penalties; recall or seizure of current or future tests, products or services; operating restrictions and partial suspension or total shutdown of production.

Changes in laws and regulations, or in their application, may adversely affect our business, financial condition and results of operations.

        The clinical laboratory testing industry is highly regulated, and failure to comply with applicable regulatory, supervisory or licensing requirements may adversely affect our business, financial condition and results of operations. In particular, the laws and regulations governing the marketing and research of clinical diagnostic testing are extremely complex and in many instances there are no clear regulatory or

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judicial interpretations of these laws and regulations, which increase the risk that we may be found to be in violation of these laws.

        The regulatory environment in which we operate may change significantly and adversely in the future. The molecular diagnostics industry as a whole is a growing industry and regulatory agencies such as the FDA may also apply heightened scrutiny to new developments in the field of molecular diagnostics. While we have taken steps to ensure compliance with the current regulatory regime in all material respects, given its nature and our geographical diversity, there could be areas where we are non-compliant. Should we not be in compliance with regulatory requirements or any changes thereto, we may be subject to sanctions which could include required changes to our operations, adverse publicity, substantial financial penalties and criminal proceedings. Any change in the laws and the regulations relating to our business, whether in the form of new or amended laws or regulations or regulatory policies, or the application of any of the above, may adversely affect our business, financial condition and results of operations by increasing our costs to comply with the new laws or constraining our ability to develop, market and commercialize our tests.

        For example, a development affecting our industry is the increased enforcement of the federal False Claims Act and, in particular, actions brought pursuant to the False Claims Act's "whistleblower" or "qui tam" provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payer program. The qui tam provisions of the False Claims Act allow a private individual to bring civil actions on behalf of the federal government for violations of the False Claims Act and permit such individuals to share in any amounts paid by the defendant to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it is subject to mandatory damages of three times the actual damages sustained by the government, plus mandatory civil penalties ranging from $5,500 to $11,000 for each false claim. In addition, various states have enacted false claim laws analogous to the federal False Claims Act, and in some cases go even further because many of these state laws apply where a claim is submitted to any third-party payer and not merely a governmental payer program.

        In addition, there has been a recent trend of increased U.S. federal and state regulation of payments made to physicians, which are governed by laws and regulations including the Stark law. Among other requirements, the Stark law requires laboratories to track, and places a cap on, non-monetary compensation provided to referring physicians. While we have a compliance plan to address compliance with applicable fraud and abuse laws and regulations, the evolving commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and reporting requirements increases the possibility that we could violate one or more of these requirements.

Our business could be adversely impacted by CMS' adoption of the new code set for diagnoses.

        CMS has adopted a new code set for diagnosis, commonly known as ICD-10, which significantly expands the code set for diagnoses. The new code set is currently required to be implemented by October 1, 2015. These new requirements could prove technically difficult, time-consuming or expensive to implement. Our failure or the failure of third-party payers or physicians to transition within the required timeframe could have an adverse impact on reimbursement, days sales outstanding and cash collections. In addition, physicians may fail to provide appropriate codes for ordered tests leading to delays in billing, which could result in increased costs and decreased collection of payment. As a result, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues.

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If we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.

        We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations require clinical laboratories to obtain a certificate and mandate specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management and quality assurance. CLIA certification is also required in order for us to be eligible to bill state and federal healthcare programs, as well as many private third-party payers, for our tests. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical laboratory.

        We are also required to maintain state licenses to conduct testing in our laboratories. California law establishes standards for day-to-day operation of our clinical laboratory in San Carlos, including the training and skills required of personnel and quality control matters. We maintain a current license in good standing with the California Department of Health Services, or DHS. However, we cannot provide assurance that DHS will at all times in the future find us to be in compliance with all such laws. If our clinical laboratory is out of compliance, DHS may suspend, restrict or revoke the license to operate our clinical laboratory, assess substantial civil money penalties, or impose specific corrective action plans. Any such actions could materially affect our business.

        In addition, our clinical laboratory is required to be licensed by New York State. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether such laboratories are located in New York. We have obtained a license from the New York State Department of Health, or DOH, for our San Carlos laboratory. We cannot provide assurance the DOH will at all times find us to be in compliance with applicable laws. Should we be found out of compliance with New York laboratory requirements, the DOH may suspend, limit, revoke or annul our laboratory's New York license, censure us or assess civil money penalties.

        Moreover, several other states require that we hold licenses to test samples from patients in those states. We have obtained licenses from states where we believe we are required to be licensed. From time to time, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states do have such requirements or will have such requirements in the future. If we identify any other state with such requirements or if we are contacted by any other state advising us of such requirements, we expect to seek to comply with such requirements.

        Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure, or our failure to renew a CLIA certificate, a state license or accreditation, could have a material adverse effect on our business. The CMS also has the authority to impose a wide range of sanctions, including revocation of the CLIA certification along with a bar on the ownership or operation of a CLIA-certified laboratory by any owners or operators of the deficient laboratory. If we were to lose our CLIA certification or required state licensure, we would not be able to operate our clinical laboratory and conduct our prenatal tests, in full or in particular states, which would adversely impact our business and results of operations.

Changes in government healthcare policy could increase our costs and negatively impact coverage and reimbursement for our tests by governmental and other third-party payers.

        The U.S. government has shown significant interest in pursuing healthcare reform and reducing healthcare costs. Government healthcare policy has been and, we expect, will continue to be a topic of extensive legislative and executive activity in the U.S. federal and many U.S. state governments. As a result, our business could be affected by significant and potentially unanticipated changes in government healthcare policy, such as changes in reimbursement levels by public third-party payers. Any of these or

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other changes could substantially impact our revenues, increase costs and divert management attention from our business strategy. Going forward, we cannot predict the full impact of governmental healthcare policy changes on our business, financial condition and results of operations.

        In the United States, the Patient Protection and Affordable Care Act, as amended by the HealthCare and Education Affordability Reconciliation Act of 2010, or collectively, the PPACA, was signed into law in March 2010 and significantly impacts the U.S. pharmaceutical and medical device industries, including the diagnostics sector, in a number of ways. A number of states have challenged the constitutionality of certain provisions of the PPACA, and many of these challenges are still pending final adjudication in several jurisdictions. Members of Congress have also proposed a number of legislative initiatives, including possible repeal of the PPACA. At this time, it remains unclear whether there will be any changes made to the PPACA, whether to certain provisions or its entirety.

        Currently, under the PPACA, each medical device manufacturer will have to pay a sales tax in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices that are listed with the FDA. Although the FDA has contended that clinical LDTs, such as Panorama and our other tests, are medical devices, the FDA has generally exercised its discretion not to regulate such tests at this time, and, as a result, none of our tests are currently listed with the FDA. FDA officials have indicated that a laboratory will not have to pay the tax under the proposed "notification" procedure in one of the two draft guidances. However, the laboratory would have to pay the tax at the time that it lists the test with the FDA. In the FDA's draft guidance on the issue, listing occurs at the time a laboratory submits either a PMA or 510(k) for the test. If the guidance is finalized as currently drafted, the application of this tax to our business could harm our business, financial condition, results of operations, and cash flows, as most third-party payers, including Medicaid, will not reimburse for use of medical devices which must be cleared or approved by the FDA but which have not been. From time to time, the tax is subject to legislative and executive discussion regarding potential repeal. The PPACA also mandates a reduction in payments for clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule, or CLFS, of 1.75% for the years 2011 through 2015.

        Other significant measures contained in the PPACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The PPACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. We are monitoring the impact of the PPACA to determine any trends and changes resulting from the legislation that may impact our business over time.

        Among other things, the PPACA creates a new system of health insurance "exchanges," designed to make health insurance policies available to individuals and certain groups through state- or federally-administered marketplaces in addition to existing channels for obtaining health insurance coverage. In connection with such exchanges, certain "essential health benefits" are intended to be made more consistent across plans, setting a baseline coverage level. The states (and the federal government) have some discretion in determining the definition of "essential health benefits" and we cannot predict at this time whether Panorama will fall into a benefit category deemed "essential" for coverage purposes across the plans offered in any or all of the exchanges. Failure to be covered by plans offered in the exchanges could harm our business.

        In addition to the PPACA, various healthcare reform proposals have also emerged from federal and state governments. The Protecting Access to Medicare Act of 2014 introduces a multi-year pricing program for services paid under the CLFS that is designed to bring Medicare allowable amounts in line with the amounts paid by private payers. For newly developed advanced diagnostic tests for which there is no CLFS payment amount, the Medicare payment rate for approved tests for the first three quarters that the tests

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are offered will be the actual list price offered to third-party payers. Thereafter, CMS will use the data collected under the Act to establish payment rates for such newly developed advanced diagnostic tests. CMS will assign unique Healthcare Common Procedure Coding System, or HCPCS, codes for existing advanced diagnostic tests by January 1, 2016, and publicly report the payment rates for such tests. CMS will assign temporary HCPCS codes to newly developed approved advanced diagnostic tests and finalize such HCPCS codes within two years. In addition, federal budgetary limitations and changes in healthcare policy, such as the creation of broad limits for NIPTs or requirements that beneficiaries of the government health plans pay for, or pay for higher, portions of clinical laboratory tests or services received, could substantially diminish the sale, or inhibit the utilization, of future NIPTs, increase costs, divert management's attention and adversely affect our ability to generate revenues and achieve profitability.

        We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or how any such future legislation, regulation or initiative may affect us. The taxes imposed by the new federal legislation and the expansion of government's role in the U.S. healthcare industry, as well as changes to the reimbursement amounts paid by payers for our current and future tests, may adversely affect the volumes of services and tests that we provide and may therefore adversely affect our business, financial condition, results of operations, and cash flows.

If we or our laboratory partners, consultants or commercial partners market tests in a manner that violates healthcare fraud and abuse laws or otherwise engage in misconduct, we may be subject to civil or criminal penalties.

        We are also subject to healthcare fraud and abuse regulation and enforcement by both the U.S. federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

    CLIA and U.S. state laws and regulations governing the certification and licensure of laboratories, as well as the operations and activities of laboratories;

    HIPAA, which created U.S. federal civil and criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and also imposes obligations with respect to maintenance of the privacy, security and transmission of individually identifiable health information;

    U.S. federal and state laws and regulations governing informed consents for genetic testing and the use of genetic material;

    state laws and regulations governing the submission of claims for healthcare services, as well as billing and collection practices associated with healthcare services;

    U.S. state laws that prohibit other specified practices, such as billing physicians for testing that they order and waiving coinsurance, copayments, deductibles, and other amounts owed by patients;

    the U.S. federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce 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 federal healthcare programs such as Medicare;

    the U.S. federal False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers who receive funds from the government that are false or fraudulent;

    U.S. state law equivalents of each of the above U.S. federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers;

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    U.S. federal laws and regulations governing the Medicare program, providers of services covered by the Medicare program, and the submission of claims to the Medicare program, as well as the Medicare Manuals issued by CMS and the local medical policies promulgated by the Medicare Administrative Contractors with respect to the implementation and interpretation of such laws and regulations;

    the federal Stark physician self-referral law, which prohibits a physician from making a referral for certain designated health services covered by the Medicare program (and according to case law in some jurisdictions, the Medicaid program as well), including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition, as well as U.S. state law equivalents of the Stark law;

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

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

        We have adopted policies and procedures designed to comply with these laws. In the ordinary course of our business, we conduct internal reviews of our compliance with these laws, and our compliance is also subject to governmental review. The growth of our business and sales organization and our expansion both within and outside of the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. If our operations, including the conduct of our employees, distributors, consultants and commercial partners, are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, exclusion from participation in government programs, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of pre-marketing product approvals, private qui tam actions brought by individual whistleblowers in the name of the government, contractual damages, reputational harm, diminished profits and future earnings and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

Changes in the way the FDA regulates the reagents, other consumables, and testing equipment we use when developing, validating, and performing our tests could result in delay or additional expense in bringing our tests to market or performing such tests for our customers.

        Many of the sequencers, reagents, kits and other consumable products used to perform our prenatal testing, as well as the instruments and other capital equipment that enable the testing, are offered for sale as analyte specific reagents, or ASRs, or for research use only, or RUO. This includes the sequencers supplied to us by Illumina and the blood collection tubes supplied to us by Streck, which are RUO in the United States. If the FDA were to require clearance or approval for the sale of Illumina's sequencers and if Illumina does not obtain such clearance or approval, or if the FDA were to find that a supplier failed to comply with applicable requirements, we would have to find an alternative sequencing platform for Panorama. If we were not successful in selecting, acquiring on commercially reasonable terms and implementing an alternative platform on a timely basis, our business, financial condition and results of operations may be adversely affected. Similarly, a decision by the FDA to require clearance or approval for

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the sale by our sole supplier in the United States of the blood collection tubes used for Panorama and our non-invasive prenatal paternity testing could result in interruptions in our ability to supply our products to the market and adversely affect our operations.

        Certain reagents are also obtained from sole suppliers and are offered for sale as ASRs. ASRs consist of single reagents or primer pairs, which are intended for use in a diagnostic application for the identification and quantification of an individual chemical substance in biological specimens. ASRs are medical devices, but most are exempt from the 510(k) and PMA premarket review processes. As medical devices, ASRs have to comply with the QSR provisions and other device requirements. In 2007, the FDA issued a Guidance Document which clarified and narrowed the scope of products that are considered ASRs. The FDA could disagree with a supplier's assessment that the reagents are ASRs, and could require the supplier to seek clearance or approval for the reagents. If the FDA were to require clearance or approval for the reagents, certain of our suppliers may cease selling the reagents to us and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations.

        Products that are intended for research use only and are labeled as RUO are exempt from compliance with the FDA requirements, including the approval or clearance and other product quality requirements for medical devices. A product labeled RUO but intended to be used diagnostically may be viewed by the FDA as adulterated and misbranded under the FDC Act and subject to FDA enforcement activities. The FDA has said it will consider the totality of the circumstances surrounding distribution and use of an RUO product, including how the product is marketed and to whom, when determining its intended use. If the FDA were to take enforcement action against certain of our suppliers' RUO products, such action could significantly and adversely affect our ability to provide timely testing results to our customers or could significantly increase our costs of conducting business. Additionally, if the FDA were to take enforcement action against RUO suppliers, certain of our suppliers may cease selling RUO products to us and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations.

Our financial condition and results of operations may be adversely affected by international government regulatory and business risks.

        We will increasingly subject ourselves to regulation in foreign jurisdictions as we offer our tests internationally. Our international operations subject us to varied and complex domestic, foreign and international laws and regulations. Compliance with these laws and regulations often involves significant costs or requires changes in our business practices that may reduce revenues and profitability. We may be subject to the regulatory approval requirements for each foreign country in which we sell our tests. Our future performance depends on, among other matters, the timely receipt of necessary regulatory approvals for our tests. Regulatory approval can be a lengthy, expensive and uncertain process. In addition, regulatory processes are subject to change, and new or changed regulations can result in increased costs and unanticipated delays. Any changes in foreign approval requirements and processes may cause us to incur additional costs or lengthen the time required for regulatory approval of our tests. We may not be able to obtain foreign regulatory approvals on a timely basis, if at all, and any failure to do so may cause us to incur additional costs or prevent us from marketing our tests in foreign countries, which may harm our business.

        We may incur additional legal compliance costs associated with our global operations and could become subject to legal penalties if we do not comply with certain regulations. For example, we are subject to the FCPA which, among other restrictions, prohibits U.S. companies and their intermediaries from making payments to foreign officials for the purpose of obtaining or retaining business or otherwise obtaining favorable treatment, as well as anti-bribery and anti-corruption laws of other jurisdictions. In addition, our international activities are subject to compliance with U.S. economic and trade sanctions, which restrict or otherwise limit our ability to do business in certain designated countries. Our training and

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compliance program and our other internal control policies and procedures may not always protect us from acts committed by our employees or agents. Other limitations, such as prohibitions on the import into the United States of tissue necessary for us to perform our tests or restrictions on the export of tissue imposed by countries outside of the United States, or restrictions on importation and circulation of blood collection tubes or other equipment or supplies by countries outside the United States, may limit our ability to offer our tests internationally in the future.

Our use of hazardous materials in the development of our tests exposes us to risks related to accidental contamination or injury and requires us to comply with regulations governing hazardous waste materials.

        Our research and development activities involve the controlled use of hazardous materials and chemicals. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. In addition, we are subject on an ongoing basis to federal, state and local regulations governing the use, storage, handling and disposal of these materials and specified hazardous waste materials. An increase in the costs of compliance with such laws and regulations could harm our business and results of operations.

If the validity of an informed consent from a patient intake for Panorama or other tests was challenged, we could be precluded from billing for such testing or forced to stop performing such tests, which would adversely affect our business and financial results.

        We are required to ensure that all clinical data and blood samples that we receive have been collected from subjects who have provided appropriate informed consent for us to perform our testing, both commercially and in clinical trials. We seek to ensure that the subjects from whom the data and samples are collected do not retain or have conferred on them any proprietary or commercial rights to the data or any discoveries derived from them. Our partners operate in a number of different countries, and, to a large extent, we rely upon them to comply with the subject's informed consent and with local law and international regulation. The collection of data and samples in many different countries results in complex legal questions regarding the adequacy of informed consent and the status of genetic material under a large number of different legal systems. The subject's informed consent obtained in any particular country could be challenged in the future, and those informed consents could prove invalid, unlawful or otherwise inadequate for our purposes. Any findings against us, or our partners, could deny us access to or force us to stop testing samples in a particular territory or could call into question the results of our clinical trials. We could become involved in legal challenges, which could require significant management and financial resources and adversely affect our revenues and results of operations.

Risks Related to Our Intellectual Property

Any failure to obtain, maintain, and enforce our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

        Our success and ability to compete depend, in part, on our ability to obtain, maintain and enforce patents, trade secrets, trademarks and other intellectual property rights and to operate without having third parties infringe, misappropriate or circumvent the rights that we own or license. If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products that are substantially the same as ours without incurring the sizeable development and licensing costs that we have incurred, which would adversely affect our ability to compete in the market. As of June 15, 2015, we held six issued U.S. patents and 42 pending U.S. patent applications. We also held one issued Australian patent and two issued Chinese patents. We have filed and are actively pursuing additional patent applications in Australia, Brazil, Canada, China, Europe, Hong Kong, Israel, India, Japan and Russia. Our ability to stop third parties from making, using, selling, offering to sell or

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importing our products or product candidates is dependent upon the extent to which we have rights under valid and enforceable patents that cover these activities. However, the patent positions of diagnostic companies, including ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. The Supreme Court has in recent years issued a number of decisions relating to the patentability of diagnostic method claims. We cannot predict what impact these decisions may have on our ability to obtain or enforce patents relating to diagnostic methods in the future. We believe that no consistent policy regarding the scope of valid patent claims in these fields has emerged to date in the United States. The patent situation in the genetic diagnostics industry outside the United States also is uncertain. Moreover, the U.S. patent laws have recently changed, there have been changes regarding how patent laws are interpreted, and the U.S. Patent and Trademark Office, or the USPTO, has introduced new procedures to the patent system. Some of these changes and procedures are currently being litigated, and we cannot accurately determine the outcome of any such proceedings or predict future changes in the interpretation of patent laws or changes to patent laws which might be enacted into law. Those changes may materially affect our patents, our ability to obtain patents or the patents and applications of our collaborators and licensors. Therefore, there can be no assurance that any current or future patent applications will result in the issuance of patents or that we will develop additional proprietary products which are patentable. Moreover, patents issued or that may be issued to us in the future may not provide us with any competitive advantage. Our patent position is subject to numerous additional risks, including the following:

    we may fail to seek patent protection for inventions that are important to our success;

    any current or future patent applications may not result in issued patents;

    we cannot be certain that we were the first to invent the inventions covered by pending patent applications or that we were the first to file such applications and, if we are not, we may be subject to priority or derivation disputes;

    we may be required to disclaim part or all of the term of certain patents or part or all of the term of certain patent applications;

    we may file patent applications but have claims restricted or we may not be able to supply sufficient data to support our claims and, as a result, may not obtain the original claims desired or we may receive restricted claims. Alternatively, it is possible that we may not receive any patent protection from an application;

    we could inadvertently abandon a patent or patent application, resulting in the loss of protection of certain intellectual property rights in a particular country. We or our patent counsel may take action resulting in a patent or patent application becoming abandoned which may not be able to be reinstated or if reinstated, may suffer patent term adjustments;

    the claims of our issued patents or patent applications when issued may not cover our products or product candidates;

    no assurance can be given that our patents would be declared by a court to be valid and enforceable or that a competitor's technology or product would be found by a court to infringe our patents. Our patents or patent applications may be challenged by third parties in patent litigation or in proceedings before the USPTO or its foreign counterparts, and may ultimately be declared invalid or unenforceable, or narrowed in scope;

    there may be prior art of which we are not aware that may affect the validity of a patent claim. There also may be prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, which may, nonetheless, ultimately be found to do so;

    third parties may develop products which have the same or similar effect as our products without infringing our patents. Such third parties may also intentionally circumvent our patents by means of alternate designs or processes or file applications or be granted patents that would block or hurt our efforts;

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    there may be patents relevant to our products or product candidates of which we are not aware;

    certain of our intellectual property was partly supported by a U.S. government grant awarded by the National Institutes of Health, and the government accordingly has certain rights in this intellectual property, including a non-exclusive, non-transferable, irrevocable worldwide license to use applicable inventions for any governmental purpose. Such rights also include "march-in" rights, which refer to the right of the U.S. government to require us to grant a license to the technology to a responsible applicant if we fail to achieve practical application of the technology or if action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give preference to U.S. industry;

    our patent counsel, lawyers or advisors may have given us, or may in the future give us incorrect advice or counsel;

    the patent and patent enforcement laws of some foreign jurisdictions may not protect intellectual property rights to the same extent as laws in the United States, and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed, and we may not pursue or obtain patent protection in all major markets; and

    we may not develop additional technologies that are patentable.

        Any of these factors could hurt our ability to gain patent protection for our products.

If our trademarks and trade names are not adequately protected, we may not be able to build name recognition in our markets of interest, and our business may be adversely affected.

        Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks. As a means to enforce our trademark rights and prevent infringement, we may be required to file trademark claims against third parties or initiate trademark opposition proceedings. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a trademark of ours is not valid or is unenforceable, or may refuse to stop the other party from using the trademark at issue. We may not be able to protect our rights to these and other trademarks and trade names which we may need to build name recognition with potential partners or customers in our markets of interest.

        Our pending trademark applications in the United States and in other foreign jurisdictions where we may file may not be allowed or may subsequently be opposed. Our applications to register the "Natera," "Panorama," "Powered by SNPs," "Prenatus," "Spectrum" and "Anora" trademarks have been allowed and/or have proceeded to registration in the United States. We have certain other trademark applications pending in the United States and abroad, but there can be no assurance that these applications will be allowed and not opposed. Even if these applications proceed to registration, third parties may challenge our use or registration of these trademarks in the future. Other companies in the medical diagnostics space may be using trademarks that are similar to ours and may in the future allege that the use of our trademarks in connection with our tests infringes or otherwise violates their trademarks. In addition, failure to maintain our trademark registrations, or to obtain new trademark registrations in the future, could limit our ability to protect our trademarks and impede our marketing efforts in the countries in which we operate. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected.

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If we are not able to prevent disclosure of our trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.

        We rely on trade secret protection to protect our interests in proprietary know-how and in processes for which patents are difficult to obtain or enforce, including the proprietary algorithm that we use to analyze DNA sequences and genetic information as part of Panorama. We may not be able to protect our trade secrets adequately. We have a policy of requiring our consultants, advisors and collaborators to enter into confidentiality agreements and our employees to enter into invention, non-disclosure and non-compete agreements. However, no assurance can be given that we have entered into appropriate agreements with all parties that have had access to our trade secrets, know-how or other proprietary information. There is also no assurance that such agreements will provide for a meaningful protection of our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure of information. Furthermore, we cannot provide assurance that any of our employees, consultants, contract personnel, or collaborators, either accidentally or through willful misconduct, will not cause serious damage to our programs and our strategy, for example by disclosing important trade secrets, know-how or proprietary information to our competitors.

        It is also possible that our trade secrets, know-how or other proprietary information could be obtained by third parties as a result of breaches of our physical or electronic security systems. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us. In addition, others may independently discover our trade secrets and proprietary information. Any action to enforce our rights is likely to be time consuming and expensive, and may ultimately be unsuccessful, or may result in a remedy that is not commercially valuable. These risks are accentuated in foreign countries where laws or law enforcement practices may not protect proprietary rights as fully as in the United States or Europe. Any unauthorized disclosure of our trade secrets or proprietary information could harm our competitive position.

We may be required to reduce the scope of our intellectual property due to third-party intellectual property claims or challenges to our patents.

        Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications, which could require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours that claims priority to an application filed prior to March 16, 2013, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions. In addition, changes enacted on March 15, 2013 to the U.S. patent laws under the America Invents Act resulted in the United States changing from a "first to invent" country to a "first to file" country. As a result, we may lose the ability to obtain a patent if a third party files on the invention we wish to patent with the USPTO first. Derivation proceedings were also established as part of the "first to file" system. Such proceedings could allow a third party to allege that we are not entitled to a patent because we derived the invention from the invention of another party. We may also become involved in similar proceedings in other jurisdictions.

        Furthermore, recent changes in U.S. patent law under the America Invents Act establish new procedures for post-issuance challenges to U.S. patents, including inter partes reviews and post-grant oppositions. There is significant uncertainty as to how the new laws will be applied and if our U.S. patents are challenged using such procedures, we may not prevail, possibly resulting in altered or diminished claim scope or loss of patent rights altogether. Similarly, some countries, notably members of the European Union, also have post grant opposition proceedings that can result in changes in scope and/or cancellation of patent claims.

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We are currently involved in patent litigation with Sequenom relating to Panorama and our non-invasive paternity test, and an adverse result could harm our business and results of operations.

        We are currently involved in patent litigation with Sequenom. An adverse ruling in such proceeding could require us to pay damages, including treble damages, attorneys' fees, costs and expenses, require us to pay license fees or result in an injunction preventing us from selling Panorama and our non-invasive prenatal paternity test, any of which could adversely affect our ability to offer these tests, our ability to continue operations and our financial condition. For more information on our current legal and regulatory proceedings, see "Business—Legal Proceedings." We may also in the future be involved with other litigation or USPTO actions with the same or other third parties. We expect that the number of such claims may increase as the number of products and the level of competition in our industry segments grows.

Our products could infringe patents and other property rights of others, which may result in costly litigation and, if we are not successful, could cause us to pay substantial damages or future licensing fees or otherwise limit our ability to commercialize our products, which could have a material adverse effect on our business.

        We operate in a crowded technology area in which multiple third parties own or control potentially relevant intellectual property, including patents. There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the genetic diagnostics industry. Numerous significant intellectual property issues have been litigated, and will likely continue to be litigated, between existing and new participants in our existing and target markets. Competitors may assert that our products infringe their intellectual property rights. Third parties may assert that we are employing their proprietary technology without authorization. In addition, our competitors and others may have patents or may in the future obtain patents and claim that making, having made, using, selling, offering to sell or importing our products infringes these patents.

        We have in the past, and may in the future, be subject to proceedings or claims that claim we have infringed, misappropriated or otherwise violated the intellectual property or other rights of others. As described above, we are currently involved in patent litigation with Sequenom. The number of such claims may increase as the number of products and the level of competition in our industry segments grows.

        We may receive notices of claims of direct or indirect infringement or misappropriation or misuse of other parties' proprietary rights from time to time. Some of these claims may lead to litigation. There can be no assurance that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted against us.

        As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other proprietary rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly stronger, larger and more mature patent portfolios than we have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success depends in part on our non-infringement of the patents or proprietary rights of third parties.

        We could incur substantial costs and divert the attention of our management and technical personnel in defending against any claims of infringement. Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a claim of infringement against us, we may be required to pay damages and ongoing royalties, elect to obtain one or more licenses from third parties, or be prohibited from selling certain products. We may not be able to obtain these licenses on acceptable terms, if at all. We could incur substantial costs related to royalty payments for licenses

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obtained from third parties, which could negatively affect our financial results. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products to avoid infringing third-party patents or proprietary rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our business and our ability to gain market acceptance for our products.

        Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be negative public announcements of the results of hearings, motions or other interim proceedings or developments, which could have a substantial adverse effect on the market price of our common stock.

        In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results, or financial condition. Patents held by third parties may force us to makes changes in our operating procedures that would be costly to implement.

Our intellectual property may be infringed upon by a third party.

        Third parties may infringe one or more of our patents, trademarks or other intellectual property rights. We cannot predict if, when or where a third party may infringe our intellectual property rights. To counter infringement, we may be required to file infringement lawsuits, which can be expensive and time consuming. There is no assurance that we would be successful in a court of law in proving that a third party is infringing one or more of our issued patents or trademarks. Any claims we assert against perceived infringers could also provoke these parties to assert counterclaims against us, alleging that we infringe their intellectual property. In addition, in a patent infringement proceeding, a court may decide that a patent of ours is invalid or unenforceable, in whole or in part, construe the patent's claims narrowly and/or refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question, any of which may adversely affect our business. Even if we are successful in proving in a court of law that a third party is infringing our intellectual property rights, there can be no assurance that we would be successful in halting their infringing activities, for example, through a permanent injunction, or that we would be fully or even partially financially compensated for any harm to our business. We may be forced to enter into a license or other agreement with the infringing third party at terms less profitable or otherwise commercially acceptable to us than if the license or agreement were negotiated under conditions between those of a willing licensee and a willing licensor. We may not become aware of a third-party infringer within legal timeframes for compensation or at all, thereby possibly losing the ability to be compensated for any harm to our business. Such a third party may be operating in a foreign country where the infringer is difficult to locate and/or the intellectual property laws may be more difficult to enforce. Some third-party infringers may be able to sustain the costs of complex infringement litigation more effectively than we can because they have substantially greater resources. Any inability to stop third-party infringement could result in loss in market share of some of our products or even lead to a delay, reduction and/or inhibition of the development, manufacture or sale of certain products by us. There is no assurance that a product produced and sold by a third-party infringer would meet our or other regulatory standards or would be safe for use. Such third-party infringer products could irreparably harm the reputation of our products thereby resulting in substantial loss in our market share and profits.

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Developments or uncertainty in the patent statute, patent case law or USPTO rules and regulations may impact the validity of our patent rights.

        Our patent rights may be affected by developments or uncertainty in the patent statute, patent case law or USPTO rules and regulations. For example, the patent position of companies engaged in the development and commercialization of diagnostic tests are particularly uncertain. Three cases involving diagnostic method claims, "gene patents," and analytical tools have been decided by the Supreme Court in the past few years. On March 20, 2012, the Supreme Court issued a decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc., a case involving patent claims directed to measuring a metabolic product in a patient to optimize a drug dosage amount for the patient. According to the Supreme Court, the addition of well-understood, routine or conventional activity such as "administering" or "determining" steps was not enough to transform an otherwise patent ineligible natural phenomenon into patent eligible subject matter. On June 13, 2013, the Supreme Court issued its decision in Association for Molecular Pathology v. Myriad Genetics, Inc., a case involving patent claims held by Myriad Genetics, Inc. relating to the breast cancer susceptibility genes BRCA1 and BRCA2. Myriad held that isolated segments of naturally occurring DNA, such as the DNA constituting the BRCA1 and BRCA2 genes, is not patent eligible subject matter, but that complementary DNA, which is an artificial construct that may be created from RNA transcripts of genes, may be patent eligible. On June 19, 2014, the Supreme Court issued its decision in Alice Corp. v. CLS Bank Int'l, a case involving the patent eligibility of computer-implemented method claims. In Alice, the Supreme Court held that implementation of an otherwise abstract idea on a computer was not enough by itself to make the idea patent-eligible. What remains unclear after Alice is how an abstract idea is defined, which the Court explicitly declined to address. We believe this has resulted in uncertainty and inconsistency in the application of Alice to software-based tools, such as proprietary analytical algorithms. On December 16, 2014, the USPTO issued an interim guidance memorandum to patent examiners for subject matter eligibility analysis of all claims involving a judicial exception (i.e., laws of nature/natural principles, natural phenomena and/or natural products, and abstract ideas). This guidance is not final, and it is expected that the guidance will change in light of future developments in the case law and in response to public feedback. While this guidance can inform decision-making at the USPTO, federal courts are not bound by this guidance.

        We cannot assure you that our efforts to seek patent protection for our technology and products will not be negatively impacted by the decisions described above, rulings in other cases or changes in guidance or procedures issued by the USPTO. We cannot predict what impact the Supreme Court's decisions in Prometheus, Myriad, and Alice may have on the ability of molecular diagnostic companies or other entities to obtain or enforce patents relating to diagnostic methods, tools, or isolated products of nature in the future. The patent-eligibility of algorithmic analysis techniques is particularly in flux.

        Moreover, although the Supreme Court has held in Myriad that isolated segments of naturally occurring DNA are not patent-eligible subject matter, certain third parties could allege that activities that we may undertake infringe other gene-related patent claims, and we may deem it necessary to defend ourselves against these claims by asserting non-infringement and/or invalidity positions, or pay to obtain a license to these patents. In any of the foregoing or in other situations involving third-party intellectual property rights, if we are unsuccessful in defending against claims of patent infringement, we could be forced to pay damages and ongoing royalties, and to obtain licenses from third parties, or be subjected to an injunction that would prevent us from utilizing the patented subject matter. We may not be able to obtain these licenses on acceptable terms, if at all. Such outcomes could materially affect our ability to offer our tests and harm our business.

        We believe our technology is differentiated from that at issue in the above cases, but the full impact of the decisions is not yet known and they have created uncertainty around the patent-eligibility of diagnostic tests and methods. The claims of our patent applications may therefore fail to issue, or if they do issue, may subsequently be challenged or invalidated, on the grounds that they include subject matter that is not

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patent-eligible based on the Supreme Court's rulings in these cases and the further evolution of case law in this area.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

        We employ individuals who were previously employed at other biotechnology or diagnostic companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees' former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we do not prevail, we could be required to pay substantial damages and could lose rights to important intellectual property. Even if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

Risks Related to Being a Public Company

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

        As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the Nasdaq Global Select Market, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. Our management and other personnel have little experience managing a public company and preparing public filings. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the Jumpstart Our Businesses Act of 2012, or the JOBS Act. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. Additional compensation costs and any future equity awards will increase our compensation expense, which would increase our general and administrative expense and could adversely affect our profitability. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance on reasonable terms. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

        We are an emerging growth company. Under the JOBS Act, emerging growth companies 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

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accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not "emerging growth companies."

        For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

        We will remain an emerging growth company until the earliest of (a) the end of the fiscal year (i) following the fifth anniversary of the closing of this offering, (ii) in which the market value of our common stock that is held by non-affiliates exceeds $700 million and (iii) in which we have total annual gross revenues of $1 billion or more during such fiscal year, and (b) the date on which we issue more than $1 billion in non-convertible debt in a three-year period.

If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected.

        As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our second annual report following this offering, which will be for the year ending December 31, 2016, provide a management report on internal controls over financial reporting. The Sarbanes-Oxley Act also requires that our management report on internal controls over financial reporting be attested to by our independent registered public accounting firm, to the extent we are no longer an emerging growth company. We do not expect to have our independent registered public accounting firm attest to our management report on internal controls over financial reporting for so long as we are an emerging growth company.

        If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal controls over financial reporting required to comply with this obligation, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or, when required in the future, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

Risks Related to This Offering and Ownership of Our Common Stock

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

        Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. An

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active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult for our stockholders to sell shares purchased in this offering without depressing the market price for the shares or at all.

The market price of our common stock is likely to be volatile which could subject us to litigation.

        The market price of our common stock is likely to be subject to wide fluctuations in response to numerous factors, many of which are beyond our control, such as those in this "Risk Factors" section and others including:

    actual or anticipated variations in our and our competitors' results of operations;

    announcements by us or our competitors of new products, significant acquisitions, strategic and commercial partnerships and relationships, joint ventures, collaborations or capital commitments;

    changes in reimbursement by current or potential payers;

    issuance of new securities analysts' reports or changed recommendations for our stock;

    periodic fluctuations in our revenue, due in part to the way in which we recognize revenue;

    actual or anticipated changes in regulatory oversight of our products;

    developments or disputes concerning our intellectual property or other proprietary rights;

    commencement of, or our involvement in, litigation;

    announcement or expectation of additional debt or equity financing efforts;

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

    any major change in our management and

    general economic conditions and slow or negative growth of our markets.

        In addition, if the market for life sciences stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of our management's attention and resources.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

        We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds from this offering for any of the purposes described in "Use of Proceeds," and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We do not intend to pay dividends on our capital stock so any returns will be limited to changes in the value of our common stock.

        We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay

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cash dividends on our capital stock may be prohibited or limited by the terms of any current or future debt financing arrangement. Any return to stockholders will therefore be limited to the increase, if any, of the price of our common stock.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution.

        The initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock as of March 31, 2015. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of approximately $12.96 per share, based on an assumed initial public offering price of $17.50 per share, the midpoint of the price range on the cover page of this prospectus.

        This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering, and any previous exercise of stock options granted to our service providers. In addition, as of March 31, 2015, options to purchase 9,357,611 shares of our common stock with a weighted-average exercise price of approximately $2.87 per share were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive less than the purchase price paid in this offering, if anything, in the event of our liquidation.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our common stock to decline.

        We may issue additional securities following the completion of this offering. In the future, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. We also expect to issue common stock to employees and directors pursuant to our equity incentive plans. If we sell common stock, convertible securities or other equity securities in subsequent transactions, or common stock is issued pursuant to equity incentive plans, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our common stock.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders following this offering could cause the price of our common stock to decline.

        Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.

        All of our executive officers and directors and the holders of substantially all of our capital stock are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders' ability to transfer shares of our common stock for at least 180 days from the date of this prospectus. Subject to certain limitations, approximately 38,357,699 shares will become eligible for sale upon expiration of the 180-day lock-up period. In addition, shares issued or issuable upon exercise of options vested as of the expiration of the 180-day lock-up period will be eligible for sale at that time. Sales of stock by these stockholders could adversely affect the trading price of our common stock.

        Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by

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our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could adversely affect the trading price of our common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

        The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock could be adversely affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

Insiders have substantial control over us and will be able to influence corporate matters.

        As of May 31, 2015, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 34.3% of our outstanding capital stock upon the completion of this offering. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit stockholders' ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.

        Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions, among other things:

    authorize the issuance of "blank check" preferred stock that our board of directors could use to implement a stockholder rights plan;

    prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

    eliminate the ability of our stockholders to call special meetings of stockholders;

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings;

    establish a classified board of directors so that not all members of our board are elected at one time;

    permit the board of directors to establish the number of directors;

    provide that directors may only be removed "for cause" and only with the approval of 75% of our stockholders;

    require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and amended and restated bylaws; and

    provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated bylaws.

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        In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock.

        For information regarding these and other provisions, see "Description of Capital Stock."

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

        Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results, and financial condition.

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect," "could," "plan," "potential," "predict," "seek," "should," "would" or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. These forward-looking statements include, but are not limited to, statements concerning the following:

    our expectation that, for the foreseeable future, a significant portion of our revenues will be derived from sales of Panorama;

    our ability to expand our sales and marketing capabilities to increase demand for Panorama, expand geographically, and obtain favorable coverage and reimbursement determinations from third-party payers;

    our reliance on our partners to market and offer Panorama in the United States and in international markets;

    our expectation that Panorama will be adopted for broader use in average-risk pregnancies and for the screening of microdeletions;

    developments or disputes concerning our intellectual property or other proprietary rights;

    our ability to successfully expand our product offerings to include cancer-related and other diagnostic tests;

    competition in the markets we serve;

    our expectations of the reliability, accuracy, and performance of Panorama;

    our expectations of the benefits to patients, providers, and payers of Panorama;

    our reliance on collaborators such as medical institutions, contract laboratories, laboratory partners, and other third parties;

    our ability to operate our laboratory facility and meet expected demand;

    our reliance on a limited number of suppliers, including sole source suppliers, which may impact the availability of replacement laboratory instruments and materials;

    our expectations of the rate of adoption of Panorama and of any of our future tests by laboratories, clinics, clinicians, payers, and patients;

    our ability to publish peer-reviewed medical publications regarding Panorama and any of our future tests;

    the factors we believe drive demand for Panorama and our ability to sustain or increase such demand;

    our ability to successfully implement our cloud-based distribution model;

    our ability to develop additional revenue opportunities, including new tests;

    the scope of protection we establish and maintain for intellectual property rights covering Panorama and any other test we may develop;

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    our estimates regarding our costs and risks associated with our international operations and international expansion;

    our ability to retain and recruit key personnel, including expanding our direct sales force;

    our relying to a much greater extent on our direct sales efforts;

    our expectations regarding acquisitions and strategic operations;

    our ability to fund our working capital requirements;

    our compliance with federal, state, and foreign regulatory requirements;

    the factors that may impact our financial results; and

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

        These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

        You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

        You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

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INDUSTRY AND MARKET DATA

        We obtained the industry, market and competitive position data used throughout this registration statement from our own internal estimates and research, as well as from industry and general publications, in addition to research, surveys and studies conducted by third parties. Internal estimates are derived from publicly-available information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In addition, while we believe the industry, market and competitive position data included in this registration statement is reliable and is based on reasonable assumptions, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed in "Risk Factors." These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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USE OF PROCEEDS

        We estimate that the net proceeds to us from the issuance of our common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $159.1 million, or approximately $183.5 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $17.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

        Each $1.00 increase (decrease) in the assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) net proceeds to us by $9.3 million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 increase (decrease) in the number of shares of common stock offered by us would increase (decrease) net proceeds to us by approximately $16.3 million, assuming an initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        The principal purposes of this offering are to increase our financial flexibility, increase our visibility in the marketplace, create a public market for our common stock, obtain additional working capital and facilitate our future access to the public equity markets. We currently intend to use approximately $59.1 million of the net proceeds received by us from this offering for working capital and general corporate purposes and approximately $100.0 million for continued investments in research and development for our core technology and development of our product offerings. In addition, we may use a portion of the net proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. However, we have no current understandings, agreements or commitments for any material acquisitions at this time, and we have not allocated specific amounts of the net proceeds received by us from this offering for any of these purposes. We have not yet determined the manner in which we will allocate the net proceeds received by us from this offering, and as a result, management will have broad discretion in the allocation and use of the net proceeds.

        Pending our use of the net proceeds received by us from this offering, we intend to invest the net proceeds in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.


DIVIDEND POLICY

        We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Our credit agreement with ROS Acquisition Offshore LP and our loan and security agreement with Comerica Bank each restricts our ability to pay cash dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that may further restrict our ability to declare or pay cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2015, as follows:

    on an actual basis, except to the extent it has been adjusted to give effect to a 1-for-1.63 reverse split of our capital stock;

    on a pro forma basis to give effect to:

    the filing and effectiveness of our amended and restated certificate of incorporation; and

    the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 31,397,221 shares of common stock, provided, however, that in the event that the actual initial public offering price is lower than $12.7629 per share, the shares of Series F preferred stock will convert into a larger number of shares of common stock (for example, in the event that the actual initial public offering price is $12.00, $11.00 or $10.00 per share, the aggregate number of additional shares of common stock issuable to the holders of Series F preferred stock will be approximately 276,460 shares, 696,915 shares or 1,201,460 shares, respectively); and

    on a pro forma as adjusted basis to give further effect to the receipt by us of the estimated net proceeds from the sale of 10,000,000 shares of common stock in this offering at an assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        You should read this table in conjunction with "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus.

 
  As of March 31, 2015  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
  (In thousands, except share and
per share data)

 
 
   
  (Unaudited)
 

Cash and cash equivalents

  $ 80,348   $ 80,348   $ 239,398  
               
               

Convertible preferred stock, par value $0.0001 per share: 51,232,536 shares authorized, 31,397,221 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

  $ 240,585   $   $  

Stockholders' (deficit) equity:

                   

Preferred stock, par value $0.0001 per share: no shares authorized, issued or outstanding, actual; 50,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

             

Common stock, par value $0.0001 per share: 82,000,000 shares authorized, 6,960,478 shares issued and outstanding, actual; 750,000,000 shares authorized, 38,357,699 shares issued and outstanding, pro forma, 48,357,699 shares issued and outstanding, pro forma as adjusted

    1     4     5  

Additional paid-in capital

    9,725     250,307     409,356  

Accumulated deficit

    (189,812 )   (189,812 )   (189,812 )
               

Total stockholders' (deficit) equity

    (180,086 )   60,499     219,549  
               

Total capitalization

  $ 60,499   $ 60,499   $ 219,549  
               
               

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        Each $1.00 increase (decrease) in the assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid-in capital, total capitalization and total stockholders' equity by $9.3 million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 increase (decrease) in the number of shares of common stock offered by us would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid-in capital, total capitalization and total stockholders' equity by approximately $16.3 million, assuming an initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

        If the underwriters' over-allotment option were exercised in full, pro forma as adjusted cash and cash equivalents, common stock, additional paid-in capital, total stockholders' equity and shares issued and outstanding as of March 31, 2015 would be $263.8 million, $4,986, $434.0 million, $244.0 million and 49,857,699, respectively.

        The number of shares of common stock that will be outstanding after this offering is based on 38,357,699 shares outstanding as of March 31, 2015, provided, however, that in the event that the actual initial public offering price is lower than $12.7629 per share, the shares of Series F preferred stock will convert into a larger number of shares of common stock (for example, in the event that the actual initial public offering price is $12.00, $11.00 or $10.00 per share, the aggregate number of additional shares of common stock issuable to the holders of Series F preferred stock will be approximately 276,460 shares, 696,915 shares or 1,201,460 shares, respectively), on an as-converted basis, and excludes:

    818,400 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2015, with a weighted-average exercise price of $1.08 per share, of which 429,440 shares will automatically net exercise into approximately 429,029 shares of common stock upon closing of this offering, assuming an initial public offering price of $17.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

    33,742 shares of common stock issuable upon the deemed conversion of 33,742 shares of our convertible preferred stock, which are issuable upon the exercise of warrants outstanding as of March 31, 2015, with an exercise price of $1.8908 per share;

    9,357,611 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2015, with a weighted-average exercise price of $2.87 per share;

    409,975 shares of common stock issuable upon the exercise of options granted after March 31, 2015, with an exercise price of $12.8501 per share; and

    4,467,742 shares of common stock, subject to increase on an annual basis, reserved for future grant or issuance under our stock-based compensation plans, consisting of:

    122,699 shares of common stock as of March 31, 2015 reserved for future grants under our 2007 Stock Plan, which shares will be added to the shares to be reserved under our 2015 Equity Incentive Plan, or the 2015 Plan, which will become effective in connection with the completion of this offering;

    3,451,495 shares of common stock reserved for future grants under our 2015 Plan;

    893,548 shares of common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, or the 2015 ESPP, which will become effective in connection with the completion of this offering; and

    an additional number of shares subject to awards outstanding under our 2007 Stock Plan that expire, terminate or are forfeited.

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DILUTION

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

        The pro forma net tangible book value of our common stock as of March 31, 2015 was $60.5 million, or $1.58 per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of our common stock, after giving effect to the pro forma adjustments referenced under "Capitalization."

        After giving effect to (i) the pro forma adjustments referenced under "Capitalization" and (ii) our receipt of the net proceeds from our sale of 10,000,000 shares of our common stock in this offering at an assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2015 would have been $219.5 million, or $4.54 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.96 per share to our existing stockholders and an immediate dilution of $12.96 per share to investors purchasing our common stock in this offering, as illustrated in the following table:

Assumed initial public offering price per share

        $ 17.50  

Pro forma net tangible book value (deficit) per share as of March 31, 2015

  $ 1.58        

Increase in pro forma net tangible book value (deficit) per share attributable to new investors

    2.96        
             

Pro forma as adjusted net tangible book value (deficit) per share after this offering

          4.54  
             

Dilution per share to investors participating in this offering

        $ 12.96  
             
             

        Each $1.00 increase (decrease) in the assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by approximately $9.3 million, or approximately $0.19 per share, and increase (decrease) the dilution per share to investors in this offering by approximately $0.81 per share, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000 shares increase or decrease in the number of shares of common stock offered by us would increase or decrease our pro forma as adjusted net tangible book value by approximately $16.3 million, or an increase of approximately $0.24 per share or a decrease of approximately $(0.25) per share, and the pro forma dilution per share to investors in this offering would decrease by approximately $(0.24) per share or increase by approximately $0.25 per share, assuming an initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

        If the underwriters' over-allotment option were exercised in full, the pro forma as adjusted net tangible book value after this offering would be $4.89 per share, the increase in pro forma as adjusted net tangible book value to existing stockholders would be $3.31 per share and the dilution to new investors purchasing our common stock in this offering would be $12.61 per share.

        The following table summarizes as of March 31, 2015, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by investors purchasing our common stock in

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this offering at an assumed initial public offering price of $17.50 per share, the midpoint of the price range on the cover of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 
  Total Shares   Total Consideration    
 
 
  Average Price
Per Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders before this offering

    38,357,699     79 % $ 134,799,692     44 % $ 1.59  

New investors

    10,000,000     21     175,000,000     56     17.50  
                         

Total

    48,357,699     100 % $ 309,799,692     100 %      
                         
                         

        Each $1.00 increase (decrease) in the assumed initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $9.3 million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 increase (decrease) in the number of shares offered by us would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $16.3 million, assuming an initial public offering price of $17.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        If the underwriters' over-allotment option were exercised in full, existing stockholders would own 76.9% and new investors would own 23.1% of the total number of shares of our common stock outstanding immediately after this offering.

        The number of shares of common stock that will be outstanding after this offering is based on 38,357,699 shares outstanding as of March 31, 2015, provided, however, that in the event that the actual initial public offering price is lower than $12.7629 per share, the shares of Series F preferred stock will convert into a larger number of shares of common stock (for example, in the event that the actual initial public offering price is $12.00, $11.00 or $10.00 per share, the aggregate number of additional shares of common stock issuable to the holders of Series F preferred stock will be approximately 276,460 shares, 696,915 shares or 1,201,460 shares, respectively), on an as-converted basis, and excludes:

    818,400 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2015, with a weighted-average exercise price of $1.08 per share, of which 429,440 shares will automatically net exercise into approximately 429,029 shares of common stock upon closing of this offering, assuming an initial public offering price of $17.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus;

    33,742 shares of common stock issuable upon the deemed conversion of 33,742 shares of our convertible preferred stock, which are issuable upon the exercise of warrants outstanding as of March 31, 2015, with an exercise price of $1.8908 per share;

    9,357,611 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2015, with a weighted-average exercise price of $2.87 per share;

    409,975 shares of common stock issuable upon the exercise of options granted after March 31, 2015, with an exercise price of $12.8501 per share; and

    4,467,742 shares of common stock, subject to increase on an annual basis, reserved for future grant or issuance under our stock-based compensation plans, consisting of:

    122,699 shares of common stock as of March 31, 2015 reserved for future grants under our 2007 Stock Plan, which shares will be added to the shares to be reserved under our 2015 Plan, which will become effective in connection with the completion of this offering;

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      3,451,495 shares of common stock reserved for future grants under our 2015 Plan;

      893,548 shares of common stock reserved for future issuance under our 2015 ESPP, which will become effective in connection with the completion of this offering; and

      an additional number of shares subject to awards outstanding under our 2007 Stock Plan that expire, terminate or are forfeited.

        To the extent that any outstanding options or warrants are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2007 Stock Plan and outstanding common stock warrants and preferred stock warrants as of March 31, 2015 were exercised, then our existing stockholders, including the holders of these options and warrants, would own 82.9% and our new investors would own 17.1% of the total number of shares of our common stock outstanding upon the closing of this offering.

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SELECTED FINANCIAL DATA

        We derived the selected statements of operations data for the years ended December 31, 2013 and 2014 and the selected balance sheet data as of December 31, 2013 and 2014 from our audited financial statements included elsewhere in this prospectus. The selected statements of operations data for the three months ended March 31, 2014 and 2015 and the balance sheet data as of March 31, 2015 are derived from our unaudited condensed interim financial statements included elsewhere in this prospectus. The unaudited interim financial statements were prepared on a basis consistent with our audited financial statements and, in the opinion of management, include all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. You should read the selected financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements, related notes and other financial information included elsewhere in this prospectus. The selected financial data is qualified in its entirety by the financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future and are not necessarily indicative of the results to be expected for the full year or any other period.

 
  Year Ended
December 31,
  Three Months
Ended March 31,
 
 
  2013   2014   2014   2015  
 
   
   
  (unaudited)
 
 
  (In thousands, except per share data)
 

Statements of Operations Data:

                         

Revenues:

                         

Product revenues

  $ 54,955   $ 157,308   $ 27,209   $ 46,899  

Other revenues

    216     1,981     86     536  
                   

Total revenues

    55,171     159,289     27,295     47,435  

Cost and expenses:

   
 
   
 
   
 
   
 
 

Cost of product revenues

    37,275     78,396     15,900     24,843  

Research and development

    11,550     17,292     4,298     5,630  

Selling, general and administrative

    31,614     62,936     14,379     23,239  
                   

Total cost and expenses

    80,439     158,624     34,577     53,712  
                   

Income (loss) from operations

    (25,268 )   665     (7,282 )   (6,277 )

Interest expense

    (1,873 )   (4,219 )   (809 )   (1,010 )

Interest expense from accretion of convertible notes

    (7,901 )            

Interest (expense) benefit from changes in the fair value of long-term debt

    (2,166 )   118     (806 )   (1,800 )

Interest income and other (expense), net

    98     (1,716 )   (719 )   (917 )
                   

Net loss

  $ (37,110 ) $ (5,152 ) $ (9,616 ) $ (10,004 )
                   
                   

Net loss per share, basic and diluted

  $ (9.66 ) $ (1.07 ) $ (2.09 ) $ (1.89 )
                   
                   

Shares used to compute net loss per share, basic and diluted

    3,841     4,800     4,591     5,289  
                   
                   

Pro forma net loss per share, basic and diluted (unaudited)

        $ (0.16 )       $ (0.27 )
                       
                       

Shares used to compute pro forma net loss per share, basic and diluted (unaudited)

          32,326           36,686  
                       
                       

 

 
  As of December 31,    
 
 
  As of
March 31,
2015
 
 
  2013   2014  
 
   
   
  (unaudited)
 
 
  (In thousands)
 

Balance Sheets Data:

                   

Cash and cash equivalents

  $ 30,496   $ 87,176   $ 80,348  

Restricted cash

    896     1,311     1,346  

Working capital

    25,538     76,605     67,955  

Total assets

    59,723     123,623     120,104  

Long-term debt

    22,464     24,474     25,689  

Convertible preferred stock

    185,199     240,612     240,585  

Total stockholders' deficit

    (171,509 )   (171,335 )   (180,086 )

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Risk Factors" included elsewhere in this prospectus.

Overview

        We are a rapidly growing diagnostics company with proprietary molecular and bioinformatics technology that we are deploying to change the management of genetic disease worldwide. Our novel molecular assays reliably measure many informative regions across the genome from samples as small as a single cell. Our statistical algorithms combine these measurements with data available from the broader scientific community to detect a wide range of serious conditions with best in class accuracy and coverage. In addition to our direct sales force in the United States, which we are continuing to expand, we have a global network of over 70 laboratory and distribution partners, including many of the largest international laboratories. We are enabling even wider adoption of our technology by introducing a global cloud-based distribution model. We have launched seven molecular diagnostic tests since 2009, and we intend to launch new products in prenatal testing and oncology in the future. In March 2013, we launched Panorama, our non-invasive prenatal test, or NIPT. Over 185,000 Panorama tests were accessioned during the year ended December 31, 2014 and over 55,000 Panorama tests were accessioned during the three months ended March 31, 2015. Our revenues have grown from $4.3 million in 2010 to $159.3 million in the year ended December 31, 2014, and from $27.3 million in the three months ended March 31, 2014 to $47.4 million in the three months ended March 31, 2015.

        We were formed in 2003 under our former name, Gene Security Network. From 2006 through 2013, the National Institutes of Health awarded us cumulative grants of $5.7 million to conduct various research projects including non-invasive aneuploidy screening on circulating fetal cells for prenatal diagnosis. An initial period of research and development was followed by the commercialization of the following tests:

    2009—24 Chromosome PGS (recently rebranded as Spectrum PGS). Pre-implantation genetic screening, or PGS, to analyze chromosomal abnormalities or inherited genetic conditions during an in vitro fertilization, or IVF, cycle to select embryos that are suitable for transfer;

    2010—Pre-Implantation PGD (recently rebranded as Spectrum PGD). Pre-implantation genetic diagnosis, or PGD, to analyze inherited genetic conditions during an in vitro fertilization, or IVF, cycle to select embryos that are suitable for transfer;

    2010—POC (recently rebranded as Anora). A products of conception, or POC, test to rapidly and extensively analyze fetal chromosomal causes of miscarriages using a single nucleotide polymorphism microarray;

    2011—Non-Invasive Prenatal Paternity Testing. A test to reliably indicate paternity from fetal free-floating DNA, which is fetal DNA not contained within a cell, in a maternal blood sample, taken as early as nine weeks gestation, and a blood sample from the alleged father(s);

    2012—Carrier Screening (recently rebranded as Horizon). Carrier screening, or CS, test performed either before or during pregnancy for a large number of serious genetic disorders that could be passed on to the carrier's children;

    2013—Panorama. An NIPT that screens fetal free-floating DNA from a maternal blood sample as early as nine weeks gestation for instances of extra or missing chromosomes of interest, to identify fetal sex, and to identify triploidy, a condition where there are three sets of each chromosome and

    2014—Panorama Microdeletions Panel. An NIPT that screens fetal free-floating DNA from a maternal blood sample as early as nine weeks gestation for microdeletions associated with common

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      syndromes, including DiGeorge, Angelman, Cri-du-chat and Prader-Willi, that result in severe intellectual disability and moderate to severe physical disabilities.

    2015—Constellation Cloud-Based Software. Constellation software allows laboratory customers to gain access through the cloud to the same algorithms and bioinformatics that we use in our own laboratory. This allows laboratory customers to validate and launch tests based on our technology, including NIPT.

        In the year ended December 31, 2014, we processed substantially all of our tests in our laboratory certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, in San Carlos, California. During the three months ended March 31, 2015, we accessioned greater than 64,000 tests, including greater than 55,000 Panorama tests. In 2014, we accessioned greater than 215,000 tests, including greater than 185,000 Panorama tests. In 2013, we accessioned greater than 85,000 tests, including greater than 65,000 Panorama tests. A test is accessioned when we receive the test, the relevant information about the test is entered into our computer system and the test sample is routed into the appropriate sample flow. Our customers include independent laboratories, national and regional reference laboratories, medical centers and physician practices. We market and sell our tests both through our sales force and those of our laboratory distributors. We bill clinics, laboratory distribution partners, patients and insurance payers for the tests we perform. In cases where we bill laboratory distribution partners, our partners in turn bill clinics, patients and insurance payers. Insurers reimburse for NIPT procedures in high-risk pregnancies based on positive coverage decisions, which means that the insurer has determined that NIPT in general is medically necessary for this category of patient. In the United States, the payers with positive NIPT coverage decisions include UnitedHealthcare, AETNA, Anthem, Humana and CIGNA. We and our laboratory partners have in-network contracts with insurance providers that account for over 140 million covered lives in the United States. A "covered life" means a subscriber, or a dependent of a subscriber, who is insured under an insurance policy with the insurance carrier identified. The number of covered lives represented by insurers that have positive coverage decisions or with which we or our laboratory partners have a contract provides a measure of our access to the healthcare market. Although our target market for NIPT is a much smaller subset of the total number of covered lives because it excludes subscribers for whom our NIPT would not be performed, such as men, children and post-menopausal women, we believe the number of U.S. covered lives for whom we have access under contract represents an important indicator of our access to the total available market for our products. Insurers also reimburse for our products through out-of-network claims submission processes where we do not have a contract with that insurer.

        The principal focus of our commercial operations currently is to distribute molecular diagnostic tests through both our direct sales force and laboratory partners, and the number of tests that we accession is a key indicator that we use to assess our business. We accessioned over 64,000 tests for the three months ended March 31, 2015, compared to 44,000 tests for the three months ended March 31, 2014. We accessioned over 215,000 tests for the year ended December 31, 2014 compared to 85,000 in the year ended December 31, 2013. This increase in volume is primarily due to the commercial growth of our Panorama test. We significantly increased the number of our domestic sales specialists in the third and fourth quarters of 2014 in an effort to increase the number of tests distributed through our direct sales force. The percent of our revenues attributable to our U.S. direct sales force for the year ended December 31, 2014 was 59%, up from 45% for the year ended December 31, 2013. The percent of our revenues attributable to U.S. laboratory partners for the year ended December 31, 2014 was 26%, down from 42% for the year ended December 31, 2013. The percent of our revenues attributable to international laboratory partners and other international sales for the year ended December 31, 2014 was 14%, up from 13% for the year ended December 31, 2013. The percent of our revenues attributable to our U.S. direct sales force for the three months ended March 31, 2015 was 80%, up from 39% for the three months ended March 31, 2014. The percent of our revenues attributable to U.S. laboratory partners for the three months ended March 31, 2015 was 6%, down from 46% for the three months ended March 31, 2014. The percent of our revenues attributable to international laboratory partners and other international sales for the three months ended March 31, 2015 was 14%, down from 15% for the three months ended March 31, 2014. Our

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ability to increase our revenues and gross profit will depend on our ability to further penetrate the U.S. market with our direct sales force.

        In addition to distributing molecular diagnostic tests, we seek to establish licensing arrangements with laboratory partners related to the use of our molecular and bioinformatics capabilities. In February 2014, we entered into a licensing and service arrangement with DNA Diagnostics Center, Inc., to enable the development of a non-invasive prenatal paternity test based on our proprietary technology. We have recognized $1.1 million and $0.5 million in revenues from the arrangement during the year ended December 31, 2014 and three months ended March 31, 2015, respectively. The arrangement commenced in the second quarter of 2014. We have begun to introduce a cloud-based distribution model, allowing certain U.S. and international laboratory partners through a license to our technology, to develop and run our molecular processes in the partners' laboratories and then have the resulting raw sequenced genetic data analyzed by our proprietary algorithm that we host in the cloud. This model will result in lower revenues and gross profit per test than in cases where we process a test ourselves.

        Our revenues increased from $55.2 million in the year ended December 31, 2013 to $159.3 million in the year ended December 31, 2014, and from $27.3 million in the three months ended March 31, 2014 to $47.4 million in the three months ended March 31, 2015. We generate revenues primarily from the sale of Panorama, which we commercially launched in 2013. Panorama revenues accounted for $30.9 million, or 56%, of our 2013 revenues, $116.1 million, or 73% of our 2014 revenues and $34.8 million, or 73% of our revenues for the three months ended March 31, 2015. Sales to Quest, Progenity, DNA Diagnostics Center, Inc. and Bio-Reference Laboratory, Inc., our largest laboratory distribution partners, represented 16%, 12%, 5% and 5% of our 2013 revenues, respectively. Sales to Quest and Progenity represented a combined 51% of our 2013 revenues generated from Panorama. Sales to Quest, Bio-Reference and Progenity represented 10%, 6% and 5% of our revenues in 2014, respectively. Sales to Quest, Bio-Reference and Progenity represented a combined 27% of our revenues in 2014 generated from Panorama. Progenity terminated its agreement with us in the second quarter of 2014 and no longer distributes our NIPT. Quest terminated its agreement with us in the third quarter of 2014 and no longer distributes our NIPT. Revenues from customers outside the United States were $6.9 million and $22.8 million for the years ended December 31, 2013 and 2014, respectively and were $4.1 million and $6.6 million for the three months ended March 31, 2014 and 2015, respectively. All of our revenues have been denominated in U.S. dollars, but we expect to begin receiving foreign currency in 2015, primarily denominated in Euros. For both the year ended December 31, 2014 and three months ended March 31, 2015, approximately 14% of our revenues were generated in international markets.

        Our net losses for the years ended December 31, 2013 and 2014 were $37.1 million and $5.2 million, respectively. This included non-cash interest expense related to our convertible promissory notes issued in 2011 and 2012, or our Series C and Series D Convertible Notes, of $7.9 million and nil for the years ended December 31, 2013 and 2014, respectively, and non-cash stock compensation expense of $1.7 million and $5.2 million, for the years ended December 31, 2013 and 2014, respectively. As of December 31, 2014, we had an accumulated deficit of $179.8 million.

        Our net losses for the three months ended March 31, 2014 and 2015 were $9.6 million and $10.0 million, respectively. This included non-cash stock compensation expense of $2.6 million and $1.1 million for the three months ended March 31, 2014 and 2015, respectively. As of March 31, 2015, we had an accumulated deficit of $189.8 million.

Components of the Results of Operations

Revenues

        We generate revenues from the sale of our genetic tests, primarily from the sale of our NIPT, Panorama. We assess whether the fee is fixed or determinable based on the nature of the fee charged for the services delivered and existing contractual arrangements. For tests performed where an agreed upon reimbursement rate or fixed fee and a predictable history or likelihood of collections exists, we recognize revenues upon delivery of a report to the prescribing physician or clinic based on the established billing rate less contractual and other adjustments, such as an allowance for doubtful accounts, to arrive at the

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amount that we expect to collect. In all other situations, as we do not have a fixed or determinable price, a sufficient history of collection or we are not able to determine the price for our test, we recognize revenue when cash is received.

        We have two significant distribution channels: direct sales and through our laboratory partners. In cases where we promote our tests through our direct sales force, we generally bill directly to a patient, clinic or insurance carrier, or a combination of the insurance carrier and patient for the fees. We do not maintain an account receivable balance in our financial statements for outstanding billing to the insurance payers because we cannot determine the collectable portion of the billings until cash is received.

        In cases where we sell our tests through our laboratory partners, the majority of our laboratory partners bill the patient, clinic or insurance carrier for the performance of our tests, and we are entitled to either a fixed price per test or a percentage of their collections. For tests sold through a limited number of our laboratory partners, we bill directly to a patient, clinic or insurance carrier, or a combination of the insurance carrier and patient for the fees.

        Revenues recognized on a cash basis represented 45%, 67% and 82% of our revenues for the years ended December 31, 2013 and 2014 and for the three months ended March 31, 2015, respectively. As of June 20, 2015, we have 11 licensing and service arrangements with laboratories under our cloud-based distribution model. For the three months ended March 31, 2015, we recognized revenue from only one such arrangement.

        The fixed fees identified in contracts with laboratory partners change only if a pricing amendment is agreed upon between both parties. For cases in which there is no fixed price established with a laboratory partner, we then recognize revenues from partner distributed tests on a cash basis.

        Our ability to increase our revenues will depend on our ability to further penetrate the domestic and international markets and, in particular generate sales through our direct sales force, offer additional tests, obtain reimbursement from additional third-party payers and increase our reimbursement rate for tests performed. However, as we enter into additional in-network contracts with insurance providers, we anticipate our average reimbursement per test will decrease.

Cost of Product Revenues

        The components of our cost of product revenues are materials and service costs, personnel costs, including stock-based compensation expense, equipment and infrastructure expenses associated with testing samples, shipping charges to transport samples, third-party test fees, and allocated overhead including rent, information technology costs, equipment depreciation and utilities. Costs associated with performing tests are recorded when the test is processed regardless of whether and when revenues are recognized with respect to that test. As a result, our cost of product revenues as a percentage of revenues may vary significantly from period to period because we do not recognize all revenues in the period in which the associated costs are incurred. We expect cost of product revenues in absolute dollars to increase as the number of tests we perform increases. However, we expect that the cost per test will decrease over time due to the efficiencies we expect to gain as test volume increases and from automation and other cost reduction initiatives. In addition, to the extent we are successful in having new or existing customers adopt our cloud-based distribution model, our revenues per test will decrease and our cost of product revenues per test will also decrease.

Research and Development

        Research and development expenses include costs incurred to develop our technology, collect clinical samples and conduct clinical studies to develop and support our products. These costs consist of personnel costs, including stock-based compensation expense, prototype materials, laboratory supplies, consulting costs, regulatory costs, electronic medical record set up costs, costs associated with setting up and conducting clinical studies at domestic and international sites and allocated overhead, including rent, information technology, equipment depreciation and utilities. We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses will increase in absolute dollars in future periods as we continue to invest in research and development

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activities related to developing additional products. In the near term we will continue to grow research and development expenses in support of Panorama and other new products and programs, including the application of our proprietary technologies for cancer and other disease detection.

Selling, General and Administrative

        Selling, general and administrative expenses include executive, selling and marketing, legal, finance and accounting, human resources, billing and client services. These expenses consist of personnel costs, including stock-based compensation expense, direct marketing expenses, audit and legal expenses, consulting costs, education seminars, payer outreach programs and allocated overhead, including rent, information technology, equipment depreciation, and utilities. In the near term, we expect selling, general and administrative expenses will increase driven by the costs of hiring additional sales personnel associated with further penetrating the domestic and international market, and marketing and education expenses to drive market penetration and reimbursement. We also expect selling, general and administrative expenses to increase as a result of becoming a public company. These expenses are related to compliance with the rules and regulations of the Securities and Exchange Commission and the Nasdaq Global Select Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect our selling, general and administrative expenses will increase in absolute dollars as we expand our billing and client services functions.

Interest Expense

        Interest expense is attributable to borrowing under our senior secured term loan and our equipment financing facility. We also recognize revenue-based royalties to the lender associated with our senior secured term loan as part of interest expense.

Interest Expense from Accretion of Convertible Notes

        We recognized non-cash interest on our Series C and Series D Convertible Notes in 2012 and 2013. The conversion of our Series C and Series D Convertible Notes into Series C and Series D preferred stock took place in February 2013 and accordingly we do not expect to recognize non-cash interest related to these convertible notes in future periods.

Interest (Expense) Benefit from Changes in the Fair Value of Long-Term Debt

        Interest expense also arises from changes in the fair value associated with our senior secured term loan.

Interest Income and Other (Expense), Net

        Interest income is from interest earned on our cash and cash equivalents and other expense relates to the changes in the fair value associated with our warrants.

Critical Accounting Policies

        Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions about future events that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. These estimates and assumptions are based on management's best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ materially from these estimates and could have an adverse effect on our financial statements. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.

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Revenue Recognition

        We consider our services rendered when we deliver reports of our test results. When we have contracted a fixed or determinable price for our services and when collectability of revenues is reasonably assured, we recognize revenues upon delivery of test reports which include contractual and other adjustments, such as an allowance for doubtful accounts, to arrive at the amount that we expect to collect. The fixed fees identified in contracts change only if a pricing amendment is agreed upon between the parties. For cases in which there is no price established, we recognize revenues on a cash basis. In all other situations, as we do not have a sufficient history of collection and are not able to determine a predictable pattern of payment, we recognize revenues when cash is received.

        Certain of our arrangements include multiple deliverables. For revenue arrangements with multiple deliverables, we evaluate each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has "stand-alone value" to the customer and whether a general right of return exists. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. We use judgment in identifying the deliverables in our arrangements, assessing whether each deliverable is a separate unit of accounting, and in determining the best estimate of selling price for certain deliverables. We also use judgment in determining the period over which the deliverables are recognized in certain of our arrangements. Any amounts received that do not meet the criteria for revenue recognition are recorded as deferred revenue until such criteria are met.

        For the year ended December 31, 2014 and the three months ended March 31, 2015, we had one licensing and service arrangement with laboratories under our cloud-based distribution model. As of June 20, 2015, we have 11 such signed licensing and service arrangements with partners, of which only one partner has begun commercializing products using this model. For the three months ended March 31, 2015, we recognized revenue from only one such arrangement. We receive royalty revenue through the licensing of our proprietary technology pursuant to one such arrangement. Royalty revenues are derived from licensing and service agreements which are recognized when earned under the terms of the related agreements and are included in Other Revenues in the statements of operations. We are not currently recognizing revenues from our other licensing and service arrangements.

Income Taxes

        We file U.S. federal income tax returns and tax returns in various states. To date, we have not been audited by the Internal Revenue Service or any state income tax authority. We have not recorded any U.S. federal income tax expense for the years ended December 31, 2013 and 2014, due to our history of operating losses.

        As of December 31, 2014, our gross deferred tax assets were $27.5 million, for which we established a full valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses, or NOLs, and tax credit carryforwards. As of December 31, 2014, we had federal and state NOLs carryforwards of approximately $57.9 million and $40.8 million, respectively, which begin to expire in 2027 and 2017, respectively, if not utilized. The deferred tax assets related to NOLs do not include excess tax benefits from employee stock option exercises. We also had federal research and development credit carryforwards of approximately $2.5 million, which begin to expire in 2027, and state research and development credit carryforwards of approximately $2.0 million, which can be carried forward indefinitely.

        We are required to reduce our deferred tax assets by a valuation allowance if it is more likely than not that some or all of our deferred tax assets will not be realized. We must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of our valuation allowance, if any, we assess the likelihood that we will be able to recover our

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deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses and, based on all available evidence, we believe it is more likely than not that our recorded net deferred tax assets will not be realized. Accordingly, we recorded a valuation allowance against all of our net deferred tax assets as of December 31, 2014. We will continue to maintain a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance.

        Federal and California tax laws impose substantial restrictions on the utilization of NOLs and credit carryforwards in the event of an "ownership change" for tax purpose, as defined in Section 382 of the Internal Revenue Code. Accordingly, our ability to utilize these carryforwards may be limited as the result of such ownership change. Such a limitation could restrict the use of the NOLs in future years and possibly a reduction of the NOLs available.

        We are subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations, and require significant judgment to apply. We are no longer subject to U.S. federal, state, and local tax examinations by tax authorities for tax years before 2010. We are subject to U.S. federal, state and local tax examinations by tax authorities for all prior tax years since incorporation.

        As of December 31, 2014, the balance of gross uncertain tax benefits was $1.4 million. In 2014, the balance of gross uncertain tax benefits increased $0.5 million related to current year research credits claimed. The reversal of the uncertain tax benefits will not affect our effective tax rate to the extent that we continue to maintain a full valuation allowance against our deferred tax assets. We do not anticipate significant changes to our current uncertain tax positions through December 31, 2015. We recognize any interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2014, there were no accrued interest and penalties related to uncertain tax positions.

Fair Value Measurements

        Our financial assets and liabilities carried at fair value comprise investments in money market funds and liabilities for preferred stock warrants and our senior secured term loan. The fair value accounting guidance requires that assets and liabilities carried at fair value be classified in one of the following three categories:

    Level I: Quoted prices in active markets for identical assets and liabilities that we have the ability to access;

    Level II: Observable market-based inputs or unobservable inputs that are corroborated by market data, such as quoted prices, interest rates, and yield curves; or

    Level III: Inputs that are unobservable data points that are not corroborated by market data.

This hierarchy requires that we use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Fair Value—Senior Secured Term Loan

        We have elected to account for our senior secured term loan at fair value. The fair value of this liability represents a term loan, royalty interest, and a delayed draw loan that is based upon the achievement of certain revenues targets over the life of the contract. The fair value of the liability is determined using Level III inputs such as discounted cash-flow methodology, a Monte Carlo Simulation model for projected revenues, and the Longstaff-Schwartz model for royalty payments with significant inputs that include discount rate, projected revenues, projected royalty payments and percentage probability of occurrence for projected revenues and royalty payments. A significantly different fair value measurement could result from the following: a significant change in projected revenues in isolation, a significant change in the timing of the delayed draw loan, a significant change in the discount rate in isolation, or changes in the probability of occurrence between the outcomes in isolation.

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Stock-Based Compensation

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

 
  Year Ended
December 31,
  Three Months
Ended
March 31,
 
 
  2013   2014   2014   2015  
 
  (In thousands)
   
   
 

Cost of product revenues

  $ 62   $ 291   $ 69   $ 83  

Research and development

    616     1,593     1,053     261  

Selling, general and administrative

    979     3,273     1,488     803  
                   

Total

  $ 1,657   $ 5,157   $ 2,610   $ 1,147  
                   
                   

        Stock-based compensation related to stock options granted to our employees and non-employees is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards. No compensation cost is recognized on stock options for employees and non-employees who do not render the requisite service and therefore forfeit their rights to the stock options. We use the Black-Scholes option-pricing model to estimate the fair value of our stock options. We account for stock options issued to non-employees based on the estimated fair value of the awards using the Black-Scholes option-pricing model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in our statements of operations during the period that the related services are rendered.

        In April 2012, our board of directors modified the terms of certain stock option awards that were fully vested to reset the vesting schedule for these awards to vest over the subsequent seven years and extend the expiration of our repurchase right on these shares through May 1, 2019. In the event of an initial public offering of our common stock, the remainder of the unvested shares will become fully vested. The board of directors did not change the exercise price of the awards. We will recognize approximately $2.8 million in additional stock-based compensation over the extended vesting period of seven years, or through the earlier date of our initial public offering. We have recognized $0.1 million of such stock-based compensation expense for each of the three-month periods ended March 31, 2014 and 2015. As of March 31, 2015, $1.6 million of stock-based compensation related to these modifications remained unrecognized.

        The Black-Scholes option-pricing model requires the input of our expected stock price volatility, the expected life of the awards, a risk-free interest rate, and expected dividends. Determining these assumptions requires significant judgment. The expected term was based on the simplified method and where we did not qualify to use the simplified method, we used the lattice model, and the volatility rate was based on that of publicly traded companies in the DNA sequencing, diagnostics or personalized medicine industries. When selecting the public companies in these industries to be used in the volatility calculation, companies were selected with characteristics believed to be comparable to us, including enterprise value and financial leverage. Companies were also selected with historical share price volatility sufficient to meet the expected life of the stock options. The historical volatility data was computed using the daily closing prices for the selected companies' shares during the equivalent period of the calculated expected term of the stock options. The expected life of the non-employee option grants was based on their remaining contractual life at the measurement date. The risk-free interest rate assumption was based on U.S. Treasury instruments with maturities that were consistent with the option's expected life. The expected

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dividend assumption was based on our history and expectation of no dividends. Our assumptions are as follows:

 
  Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2013   2014   2014   2015  

Expected term (years)

    6.0     4.91—7.06     5.4—6.3     5.6—5.7  

Expected volatility

    63.7%—85.7%     73.35%—87.03%     84.4%—87.0%     72.6%—73.0%  

Expected dividend rate

    0%     0%     0%     0%  

Risk-free interest rate

    0.44%—2.86%     1.65%—2.04%     1.65%—1.94%     1.56%—1.58%  
    Expected term.    The expected term of options represents the period of time that options are expected to be outstanding. Our historical stock option exercise experience does not provide a reasonable basis upon which to estimate an expected term due to a lack of sufficient data. For granted "at-the-money" stock options, which are options granted at fair market value, we estimate the expected term by using the simplified method permitted by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. For stock options that are not granted "at-the-money," we use the binomial lattice model to calculate the expected term. The binomial lattice model is a model for determining the expected term by utilizing a range of possible future outcomes.

    Expected volatility.    As our common stock has never been publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term.

    Expected dividend.    The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

    Risk-free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.

        In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.

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

Determination of the Fair Value of Common Stock

        We have been a privately held company with no active public market for our common stock. Therefore, our board of directors, with the assistance and upon the recommendation of management and based upon independent third party valuations, has for financial reporting purposes periodically determined the estimated per share fair value of our common stock at various dates using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. Generally, we performed these valuations on a quarterly basis during the years ended December 31, 2013 and 2014 and as of March 31, 2015. In conducting these valuations, our board of

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directors considered the objective and subjective factors that it believed to be relevant in each valuation conducted, including management's best estimate of our business condition, prospects, and operating performance at each valuation date. Within the valuations performed by our board of directors, a range of factors, assumptions, and methodologies were used. The significant factors included:

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

    our stage of product commercialization;

    the illiquidity of the common stock underlying stock options;

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

    our historical operating results;

    conditions in our industry and the economy in general;

    valuations of comparable public companies;

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

    our capital structure, including the prices at which we sold our preferred stock and the rights and preferences of our various classes of equity and our outstanding debt.

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

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

        The following table summarizes by grant date the number of shares of common stock subject to stock options granted from January 2013 through the date of this prospectus, as well as the associated per share exercise price and the per share estimated fair value of the underlying common stock.

Grant Date
  Number of
Shares
  Exercise
Price Per
Share
  Common
Stock Value
Per Share on
Grant Date
 

4/18/2013

    498,917   $ 1.3855   $ 1.39  

5/16/2013

    103,673     1.3855     1.39  

2/25/2014

    2,471,617     2.6569     3.02  

2/25/2014

    46,011     2.9177     3.02  

9/18/2014

    1,422,805     3.7816     5.40  

12/10/2014

    768,704     5.3953     7.45  

3/26/2015

    1,054,974     7.4491     9.37  

6/18/2015

    409,975     12.8501     12.8501  

        Based upon an assumed initial public offering price of $17.50 per share, the midpoint of the estimated price range set forth on the cover of this prospectus, the intrinsic value of all outstanding options as of March 31, 2015 would have been $137.0 million of which approximately $74.6 million related to vested options and approximately $62.4 million related to unvested options.

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

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

        After the completion of this offering, we expect to use the market closing price for our common stock as reported on the Nasdaq Global Select Market to determine the fair value of our common stock.

Results of Operations

Comparison of Three Months Ended March 31, 2014 and 2015

 
  Three Months Ended March 31,  
 
  2014   2015   Variance   % Change  
 
  (In thousands, except percentages)
 

Revenues:

                         

Product revenues

  $ 27,209   $ 46,899   $ 19,690     72.4 %

Other revenues

    86     536     450     523.3  
                     

Total revenues

    27,295     47,435     20,140     73.8  
                     

Cost and expenses:

                         

Cost of product revenues

    15,900     24,843     8,943     56.2  

Research and development

    4,298     5,630     1,332     31.0  

Selling, general and administrative

    14,379     23,239     8,860     61.6  
                     

Total cost and expenses

    34,577     53,712     19,135     55.3  
                     

Loss from operations

    (7,282 )   (6,277 )   1,005     (13.8 )

Interest expense

    (809 )   (1,010 )   (201 )   24.8  

Interest expense benefit from changes in the fair value of long-term debt

    (806 )   (1,800 )   (994 )   123.3  

Interest income and other (expense), net

    (719 )   (917 )   (198 )   27.5  
                     

Net loss

  $ (9,616 ) $ (10,004 ) $ (388 )   4.0 %
                     
                     

Revenues

        Revenues increased $20.1 million, or 73.8%, from the three months ended March 31, 2014 to the three months ended March 31, 2015 primarily due to increased sales of Panorama. Revenues from Panorama increased $15.3 million and revenues from all other products increased $4.8 million during the three months ended March 31, 2015 compared to the three months ended March 31, 2014.

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        During the three months ended March 31, 2015, we accessioned greater than 64,000 tests, including greater than 55,000 Panorama tests. We recognized revenue on greater than 34,000 tests, including greater than 28,000 Panorama tests, in the three months ended March 31, 2015. 56% percent of the 34,000 tests and 57% of the 28,000 Panorama tests were accessioned in the three months ended March 31, 2015, and the remainder were accessioned in prior periods. During the three months ended March 31, 2014, we accessioned greater than 44,000 tests, including greater than 38,000 Panorama tests. We recognized revenue on greater than 33,000 tests, including greater than 28,000 Panorama tests, in the three months ended March 31, 2014. 74% percent of the 33,000 tests and 78% of the 28,000 Panorama tests were accessioned in the three months ended March 31, 2014, and the remainder were accessioned in prior periods. The number of tests we accession in a given period differs from the number of tests on which we recognize revenue in that period because: for certain tests we recognize revenue upon cash receipt, which may occur a number of months after the test is accessioned; and in some cases, we do not ultimately receive reimbursement or payment for tests we accession. The vast majority of tests distributed through our direct sales force are billed to insurance payers and revenue is predominantly recognized on a cash basis as price is not fixed and determinable and collection is not reasonably assured. The decrease in the percentage of tests that are both accessioned and recognized as revenue within the same quarter in the three months ended March 31, 2015 compared to the three months ended March 31, 2014 is related to a greater percentage of tests distributed through our direct sales force in the three months ended March 31, 2015 versus the three months ended March 31, 2014.

        Revenues from customers outside the United States were $4.1 million and $6.6 million for the three months ended March 31, 2014 and 2015, respectively.

Cost of product revenues

        Cost of product revenues increased $8.9 million, or 56.2%, from the three months ended March 31, 2014 to the three months ended March 31, 2015 primarily due to an increase in the volume of tests performed in the quarter combined with an increase in material and personnel costs, which are directly related to the growth in Panorama tests performed in the three months ended March 31, 2014 and the three months ended March 31, 2015. Panorama test costs on average are lower than our other products. Because Panorama represented a relatively large proportion of the total units accessioned in the three months ended March 31, 2015, average costs per unit decreased in the period. As a percentage of revenues, cost of product revenues declined from 58.3% for the three months ended March 31, 2014 to 52.4% for the three months ended March 31, 2015. Sequentially, however, cost of product revenues as a percentage of revenues increased from 45.4% for the three months ended December 31, 2014 to 52.4% for the three months ended March 31, 2015 due to reduced average reimbursement for our Panorama test relating to new Current Procedure Terminology, or CPT, codes coming into effect in January 2015 and to our incurring costs for tests accessioned in advance of recognition of related revenue.

Research and development

        Research and development expenses increased $1.3 million, or 31.0%, from the three months ended March 31, 2014 to the three months ended March 31, 2015. The increase in research and development expenses was primarily attributable to a $0.3 million increase in salaries and personnel-related costs associated with an increase in research and development headcount as well as a $0.2 million increase in outside services costs, a $0.6 million increase in laboratory expenses, and a $0.2 million increase in office, facilities and other expenses. We expect our research and development expenses will increase in absolute dollars in future periods as we continue to invest in research and development activities related to developing additional products. In the near term we will continue to grow research and development expenses in support of Panorama and other new products and programs, including the application of our proprietary technologies for cancer and other disease detection.

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Selling, general and administrative

        Selling, general and administrative expenses increased $8.9 million, or 61.6%, from the three months ended March 31, 2014 to the three months ended March 31, 2015. The increase in selling, general and administrative expenses was primarily attributable to a $6.5 million increase in salaries and personnel-related costs associated with an increase in general and administrative personnel to support our growth in sales personnel related to our direct sales model. Selling, general and administrative expenses reflects the net addition of 224 employees from March 31, 2014 to March 31, 2015. In addition, we experienced a $0.5 million increase in travel expenses and $0.6 million increase in outside services costs, primary related to legal fees. Office expenses increased $0.3 million, facilities expenses increased $0.3 million, marketing expenses increased $0.3 million and administrative and other expenses increased $0.4 million. As we continue to expand our direct sales force, we expect our selling, general and administrative expenses to continue to increase.

Interest expense

        Interest expense increased $0.2 million, from the three months ended March 31, 2014 to the three months ended March 31, 2015 and was primarily comprised of interest expense related to the senior secured term loan and equipment financing facility.

Interest expense benefit from changes in the fair value of long-term debt

        Interest expense from changes in the fair value of long-term debt increased $1.0 million from the three months ended March 31, 2014 to the three months ended March 31, 2015 due to fair value measurement of the senior secured term loan for the period ended March 31, 2015. This term loan was entered into in April 2013.

Interest income and other (expense), net

        Interest income and other (expense), net increased $0.2 million from the three months ended March 31, 2014 to the three months ended March 31, 2015 and was primarily related to the fair value measurement of the outstanding warrants as of March 31, 2015.

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Comparison of Years Ended December 31, 2013 and 2014

 
  Year Ended December 31,  
 
  2013   2014   Variance   % Change  
 
  (In thousands, except percentages)
 

Revenues:

                         

Product revenues

  $ 54,955   $ 157,308   $ 102,353     186.2 %

Other revenues

    216     1,981     1,765     817.1  
                     

Total Revenues

    55,171     159,289     104,118     188.7  
                     

Cost and expenses:

                         

Cost of product revenues

    37,275     78,396     41,121     110.3  

Research and development

    11,550     17,292     5,742     49.7  

Selling, general and administrative

    31,614     62,936     31,322     99.1  
                     

Total cost and expenses

    80,439     158,624     78,185     97.2  
                     

Income (loss) from operations

    (25,268 )   665     25,933     (102.6 )

Interest expense

    (1,873 )   (4,219 )   (2,346 )   125.3  

Interest expense from accretion of convertible notes

    (7,901 )       7,901     (100.0 )

Interest (expense) benefit from changes in the fair value of long-term debt

    (2,166 )   118     2,284     (105.4 )

Interest income and other (expense), net

    98     (1,716 )   (1,814 )   (1,851 )
                     

Net loss

  $ (37,110 ) $ (5,152 ) $ 31,958     (86.1 )%
                     
                     

Revenues

        Revenues increased $104.1 million, or 188.7%, from the year ended December 31, 2013 to the year ended December 31, 2014 primarily due to increased sales of Panorama, which was launched in March 2013. Revenues from Panorama increased $85.2 million and revenues from all other products increased $18.9 million during the year ended December 31, 2014 compared to the year ended December 31, 2013.

        During the year ended December 31, 2014, we accessioned greater than 215,000 tests, including greater than 185,000 Panorama tests. We recognized revenue on greater than 138,000 tests, including greater than 121,000 Panorama tests, in the year ended December 31, 2014. Ninety-three percent of the 138,000 tests and 94% of the 121,000 Panorama tests were accessioned in the year ended December 31, 2014, and the remainder were accessioned in prior periods. During the year ended December 31, 2013, we accessioned greater than 85,000 tests, including greater than 65,000 Panorama tests. We recognized revenue on greater than 58,000 tests, including greater than 45,000 Panorama tests, in the year ended December 31, 2013. Ninety-seven percent of the 58,000 tests and 100% of the 45,000 Panorama tests were accessioned in the year ended December 31, 2013, and the remainder were accessioned in prior periods. The number of tests we accession in a given period differs from the number of tests on which we recognize revenue in that period because: for certain tests we recognize revenue upon cash receipt, which may occur a number of months after the test is accessioned; and in some cases, we do not ultimately receive reimbursement or payment for tests we accession. Our efforts to increase the number of tests distributed through our direct sales force in the third and fourth quarters of 2014 resulted in a higher average payment per test. The vast majority of tests distributed through our direct sales force are billed to insurance payers and revenue is predominantly recognized on a cash basis as price is not fixed and determinable and collection is not reasonably assured.

        Revenues from customers outside the United States were $6.9 million and $22.8 million for the years ended December 31, 2013 and 2014, respectively.

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Cost of product revenues

        Cost of product revenues increased $41.1 million, or 110.3%, from the year ended December 31, 2013 to the year ended December 31, 2014 primarily due to an increase in material and personnel costs, which are directly related to the growth in Panorama tests performed in 2014. Panorama unit costs on average are lower than our other products. Because Panorama represented over 86% of the total units accessioned in the year ended December 31, 2014, average costs per unit decreased in the period. The cost of product revenues reflects the net addition of 39 employees from December 31, 2013 to December 31, 2014. As a percentage of revenues, cost of product revenues declined from 67.6% for the year ended December 31, 2013 to 49.2% for the year ended December 31, 2014.

Research and development

        Research and development expenses increased $5.7 million, or 49.7%, from the year ended December 31, 2013 to the year ended December 31, 2014. The increase in research and development expenses was primarily attributable to a $4.0 million increase in salaries and personnel-related costs associated with an increase in research and development personnel as well as a $0.7 million increase in outside services costs, primarily related to consulting fees, a $0.3 million increase in laboratory expenses, and a $0.7 million increase in office, facilities and other expenses. The increase in personnel-related costs included a $1.0 million increase in stock-based compensation expense. Research and development reflects the net addition of 13 employees from December 31, 2013 to December 31, 2014. We expect our research and development expenses will increase in absolute dollars in future periods as we continue to invest in research and development activities related to developing additional products. In the near term we will continue to grow research and development expenses in support of Panorama and other new products and programs, including the application of our proprietary technologies for cancer and other disease detection.

Selling, general and administrative

        Selling, general and administrative expenses increased $31.3 million, or 99.1%, from the year ended December 31, 2013 to the year ended December 31, 2014. The increase in selling, general and administrative expenses was primarily attributable to a $22.0 million increase in salaries and personnel-related costs associated with an increase in general and administrative personnel to support our growth in sales personnel related to our direct sales model. This includes a $2.3 million increase in stock-based compensation expense. Selling, general and administrative reflects the net addition of 115 employees from December 31, 2013 to December 31, 2014. In addition, we experienced a $2.5 million increase in expenses in our marketing, advertising and promotional event programs and travel primarily related to the expansion of marketing for Panorama. Travel expenses increased $3.1 million, administration and other expenses increased $1.4 million, office expenses increased $1.0 million, outside services increased $0.8 million, and facilities expenses increased $0.5 million. As we continue to expand our direct sales force, we expect our selling, general and administrative expenses to continue to increase.

Interest expense

        Interest expense increased $2.3 million, from the year ended December 31, 2013 to the year ended December 31, 2014 and was primarily comprised of interest expense related to the senior secured term loan and equipment financing facility.

Interest expense from accretion of convertible notes

        Interest expense from accretion of convertible notes decreased $7.9 million, or 100%, from the year ended December 31, 2013 to the year ended December 31, 2014 and was primarily comprised of interest from accretion of Series C and Series D Convertible Notes during the year ended December 31, 2013. These notes converted into preferred stock in February 2013.

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Interest (expense) benefit from changes in the fair value of long-term debt

        Interest expense from changes in the fair value of long-term debt decreased $2.3 million from the year ended December 31, 2013 to the year ended December 31, 2014 due to fair value measurement of the senior secured term loan for the period ended December 31, 2014. This term loan was entered into in April 2013.

Interest income and other (expense), net

        Interest income and other (expense), net decreased $1.8 million from the year ended December 31, 2013 to the year ended December 31, 2014 and was primarily related to the fair value measurement of the outstanding warrants as of December 31, 2014.

Quarterly Results of Operations

        The following tables show our unaudited quarterly statements of operations data for each of our eight most recently completed quarters. This information has been derived from our unaudited financial statements, which, in the opinion of management, have been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the financial information for the quarters presented. Historical results are not necessarily indicative of the results to be expected in future periods, and operating 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 financial statements and related notes included elsewhere in this prospectus.

 
  Three Months Ended  
 
  June 30,
2013
  Sept. 30,
2013
  Dec. 31,
2013
  March 31,
2014
  June 30,
2014
  Sept. 30,
2014
  Dec. 31,
2014
  Mar. 31,
2015
 
 
  (In thousands)
 

Revenues:

                                                 

Product revenues

  $ 10,993   $ 16,145   $ 23,168   $ 27,209   $ 35,736   $ 45,804   $ 48,559   $ 46,899  

Other revenues

    70     74     72     86     100     470     1,325     536  
                                   

Total revenues

    11,063     16,219     23,240     27,295     35,836     46,274     49,884     47,435  

Cost and expenses:

                                                 

Cost of product revenues

    8,941     9,525     12,759     15,900     19,014     20,820     22,662     24,843  

Research and development

    2,574     2,939     3,648     4,298     4,122     4,372     4,500     5,630  

Selling, general and administrative

    6,918     8,148     10,470     14,379     13,905     16,303     18,349     23,239  
                                   

Total cost and expenses

    18,433     20,612     26,877     34,577     37,041     41,495     45,511     53,712  
                                   

Income (loss) from operations

    (7,370 )   (4,393 )   (3,637 )   (7,282 )   (1,205 )   4,779     4,373     (6,277 )

Interest expense

    (447 )   (655 )   (724 )   (809 )   (936 )   (1,202 )   (1,272 )   (1,010 )

Interest expense from accretion of convertible notes

                                 

Interest (expense) benefit from changes in the fair value of long-term debt

    (1,251 )   (487 )   (428 )   (806 )   1,340     708     (1,124 )   (1,800 )

Interest income and other (expense), net

    78     (13 )   23     (719 )   287     (561 )   (723 )   (917 )
                                   

Net (loss) income

  $ (8,990 ) $ (5,548 ) $ (4,766 ) $ (9,616 ) $ (514 ) $ 3,724   $ 1,254   $ (10,004 )
                                   
                                   

Quarterly Trends

        In general, our rapid growth of revenues is attributed to reimbursement from increased volumes of our Panorama, Horizon and Anora tests. In most of the quarters presented, we added sales and marketing personnel to our direct sales channel and added laboratory operations, research and development and administrative personnel to support our growth. The sequential decrease in revenue in the quarter ended

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March 31, 2015 is mainly due to reduced average reimbursement for our Panorama test relating to new CPT codes coming into effect in January 2015 and to the delay in revenue recognition as we generally recognize a substantial portion of our revenue on a cash basis. The increase in net loss for the quarter ended March 31, 2015 compared to the last three quarters of 2014 is also due to our incurring additional compensation and commission expenses associated with increased headcount, particularly in sales and marketing personnel, in advance of such personnel becoming fully effective, as well as increased unrealized loss from changes in the fair value of long-term debt. Our historical results should not be considered a reliable indicator of our future results of operations.

Liquidity and Capital Resources

        We have incurred net losses since our inception. For the years ended December 31, 2013 and 2014 and the three months ended March 31, 2015, we had a net loss of $37.1 million, $5.2 million and $10.0 million, respectively, and we expect to incur additional losses in future periods. As of March 31, 2015, we had an accumulated deficit of $189.8 million.

        To date, we have funded our operations primarily with the net proceeds from sales of our preferred stock and convertible promissory notes, borrowings under our senior secured term loan arrangement with ROS Acquisition Offshore LP, or ROS, our credit facilities with a commercial bank and revenues from operations. We also received $5.7 million of grant income from the National Institutes of Health. As of March 31, 2015, we had $80.3 million of cash and cash equivalents and $1.3 million of restricted cash.

Series F Financing

        In November and December 2014, we received approximately $55.5 million in the aggregate from our sale of approximately 4.3 million shares of Series F convertible preferred stock.

Senior Secured Term Loan

        In April 2013, we entered into a senior secured term loan arrangement with ROS, which we refer to as the Secured Loan Arrangement. The Secured Loan Arrangement consists of a term loan, or Credit Agreement, a warrant to purchase shares of common stock and an agreement to pay royalties on our revenues, or Royalty Agreement. The Credit Agreement, as amended on June 6, 2014, consisted of up to $40.0 million in aggregate borrowing capacity, of which we borrowed $20.0 million. We did not use the remaining borrowing capacity of $20.0 million which expired on December 31, 2014.

        Our borrowings under the Credit Agreement accrue interest at a rate equal to 8% plus the greater of LIBOR or 1%. We are required to pay the accrued interest on the last day of each fiscal quarter and the full principal amount of the borrowings is due at maturity in April 2019. We may, at our option, prepay the borrowings by paying ROS a prepayment premium equivalent to ten percent of the outstanding principal. Repayment of the borrowings does not eliminate our royalty payment obligations under the Royalty Agreement, which expires no later than April 2023.

        Our obligations under the Credit Agreement are secured by substantially all of our assets, including our intellectual property. The Credit Agreement contains conditions to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of our capital stock, repurchase stock and make investments, in each case subject to certain exceptions. The Credit Agreement also includes financial covenants requiring us to maintain minimum liquidity and revenue thresholds. During the continuance of an event of default, ROS may accelerate the repayment of amounts outstanding, terminate the term loans and foreclose on all collateral. As of March 31, 2015, we were in compliance with all covenants under the terms of the Credit Agreement.

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        In connection with the Credit Agreement, we entered into a Royalty Agreement with ROS, which we amended on June 6, 2014 and which expires no later than April 2023. Under the Royalty Agreement, we are required to make a royalty payment of 1% of fiscal year revenues of up to $50.0 million and 1.5% of fiscal year incremental revenues above $50.0 million.

        In addition, in connection with the Credit Agreement, we issued a warrant to ROS to purchase 376,691 shares of common stock with an exercise price of $2.3229 per share. The warrant expires in April 2023.

Equipment Financing Facility

        In November 2011, we entered into a loan and security agreement with Comerica Bank. We amended this agreement in January 2012, May 2012, January 2013, April 2013 and most recently in December 2014, or the Fifth Amendment. The loan and security agreement, as amended, or the Equipment Financing Facility, allowed us to borrow $5.9 million to fund equipment purchases. We will pay interest on the unpaid principal at the financial institution's prime rate plus 3.10%, which equaled 6.35% upon closing of the agreement. The loan will mature on May 31, 2017. We are required to make 30 payments of principal and interest through the maturity of loan.

        We may, at our option, prepay the borrowings prior to December 2016 by paying Comerica a prepayment premium equivalent to one percent of the outstanding principal amount.

        Our obligations under the Equipment Financing Facility are secured by a first lien on specified equipment. The Equipment Financing Facility contains conditions to borrowing, events of default, and covenants, including covenants limiting our ability to dispose of assets, including our intellectual property, undergo a change in control and merge with or acquire other entities, in each case subject to certain exceptions. During the continuance of an event of default, Comerica may accelerate the repayment of amounts outstanding, terminate the credit extensions and foreclose on all collateral. As of March 31, 2015, we were in compliance with all material covenants under the terms of the Equipment Financing Facility.

        Upon satisfying all of our obligations under our arrangement with ROS, including the Credit Agreement and the Royalty Agreement, our obligations under the Equipment Financing Facility will be secured by substantially all of our assets, including our intellectual property.

Cash Flows

        Our primary uses of cash are to fund our operations as we continue to grow our business. We expect to continue to incur operating losses in future periods as our operating expenses increase to support the growth of our business. We expect that our research and development, and selling, general and administrative expenses will continue to increase as we expand our marketing efforts and increase our internal sales force to drive increased adoption of and reimbursement for Panorama, continue our research and development efforts with respect to expanding Panorama's and Horizon's capabilities and further developing our product pipeline. We expect that we will use a substantial portion of the net proceeds of this offering, in combination with our existing cash and cash equivalents, for these purposes and for the increased expenses associated with being a public company. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

        Based on our current business plan, we believe that our existing cash and cash equivalents, and our anticipated cash from operations will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Management may elect, however, to finance operations by selling additional equity securities. If additional funding is required or desired, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all, or that we will generate sufficient cash from operations to adequately fund our operating needs or achieve or sustain profitability. If we are unable

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to raise additional capital or generate sufficient cash from operations to adequately fund our operations, we will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on our ability to execute on our business plan. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be adversely affected.

        The following table summarizes our cash flows for the periods indicated:

 
  Year Ended
December 31,
  Three Months Ended
March 31,
 
 
  2013   2014   2014   2015  
 
  (In thousands)
 

Cash (used in) provided by operating activities

  $ (24,132 ) $ 10,490   $ (5,039 ) $ (2,491 )

Cash used in investing activities

    (8,245 )   (9,942 )   (2,601 )   (3,749 )

Cash (used in) provided by financing activities

    57,126     56,132     (125 )   (588 )

Net (decrease) increase in cash and cash equivalents

    24,749     56,680     (7,765 )   (6,828 )

Cash and cash equivalents at beginning of year

    5,747     30,496     30,496     87,176  
                   

Cash and cash equivalents at end of year

  $ 30,496   $ 87,176   $ 22,731   $ 80,348  
                   
                   

Cash (Used in) Provided by Operating Activities

        Cash used in operating activities for the three months ended March 31, 2015 was $2.5 million. The net loss of $10.0 million reflects non-cash charges of $1.6 million of depreciation and amortization, $1.1 million of stock compensation expense and a $2.8 million charge from the change in the value of long-term debt and warrants, and other non-cash charges of $0.1 million. The increase in net operating assets of $2.8 million was primarily due to a $1.8 million increase in inventory related to preparation of a new product launch, an increase in prepaid assets of $1.3 million and an increase in other assets of $0.2 million offset by a decrease in accounts receivable of $0.5 million. Operating liabilities increased by $4.7 million primarily driven by increases in accounts payable of $5.7 million offset by decreases in accrued compensation of $0.4 million, other accrued liabilities of $0.5 million and deferred revenue of $0.1 million.

        For the three months ended March 31, 2014, our net cash used by operating activities of $5.0 million consisted of a net loss of $9.6 million. Adjustments for non-cash items primarily consisted of non-cash stock compensation expense of $2.6 million, depreciation and amortization expense of $1.1 million, loss from change in fair value of long-term debt of $0.8 million and loss from changes in fair value of warrants of $0.7 million. Changes in working capital totaled a decrease of $0.6 million which consisted of increases in accounts payable of $1.8 million, accrued compensation of $0.2 million and accrued liabilities of $1.5 million. These activities were offset by increases in accounts receivable of $1.3 million, inventory of $2.6 million and prepaid and other current assets of $0.3 million.

        Cash provided by operating activities for the year ended December 31, 2014 was $10.5 million. The net loss of $5.2 million reflects non-cash charges of $5.1 million of depreciation and amortization, $5.2 million of stock compensation, a $1.7 million charge from the change in the value of warrants and other non-cash charges of $0.2 million. The increase in net operating assets of $0.7 million was primarily due to a $0.9 million increase in inventory to meet the material requirements for the sale of Panorama and an increase in prepaid assets of $0.1 million offset by a decrease in accounts receivable of $0.3 million. Operating liabilities increased by $4.1 million primarily driven by increases in accrued compensation of $3.0 million and other accrued liabilities of $4.4 million offset by decreases in accounts payables of $2.4 million and deferred revenue of $0.9 million.

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        Cash used in operating activities for the year ended December 31, 2013 was $24.1 million. The net loss of $37.1 million reflects non-cash charges of $7.9 million related to the conversion of the Series C and Series D Convertible Notes, $2.5 million of depreciation and amortization, $2.2 million change in fair value of long-term debt and $1.7 million of stock-based compensation. The increase in net operating assets of $15.3 million was primarily due to a $9.1 million increase in inventory to meet the material requirements for the sale of Panorama and a $5.3 million increase in accounts receivable due to increased revenues from laboratories and clinics ordering Panorama. Cash used in operating activities was offset by a $14.0 million increase in operating liabilities primarily driven by a $6.8 million increase in accounts payable, a $6.3 million increase in accrued liabilities and a $0.9 million increase in deferred revenues.

Cash Used in Investing Activities

        Cash used in investing activities for the three months ended March 31, 2015 was $3.7 million and was primarily related to the acquisition of property and equipment.

        Cash used in investing activities for the three months ended March 31, 2014 was $2.6 million and was primarily related to the acquisition of property and equipment.

        Cash used in investing activities for the year ended December 31, 2014 was $9.9 million and was primarily related to the acquisition of property and equipment.

        Cash used in investing activities for the year ended December 31, 2013 was $8.2 million and was primarily related to the acquisition of property and equipment.

Cash (Used in) Provided by Financing Activities

        Cash used in financing activities for the three months ended March 31, 2015 was $0.6 million consisting primarily of repayments of $0.6 million on the Equipment Financing Facility.

        For the three months ended March 31, 2014, net cash used in financing activities was $0.1 million, consisting of net proceeds from the Equipment Financing Facility of $0.6 million, which were offset by $0.2 million in payments on the Equipment financing Facility, an increase in restricted cash of $0.3 million and an increase in deferred costs in connection with this offering of $0.3 million.

        Cash provided by financing activities for the year ended December 31, 2014 was $56.1 million consisting primarily of $55.4 million from the sales of Series F convertible preferred stock and $5.1 million in net proceeds from the Equipment Financing Facility. This was offset by repayments of $2.5 million on the Equipment Financing Facility, increases in deferred offering costs $1.7 million and an increase in restricted cash of $0.4 million.

        Cash provided by financing activities for the year ended December 31, 2013 was $57.1 million and consisted primarily of $35.4 million from the sale of Series E convertible preferred stock and bridge loan, $20.0 million from the Credit Agreement draw down, and $3.2 million in net proceeds from the Equipment Financing Facility. This was offset by issuance costs of $0.4 million in connection with the sale Series E convertible preferred stock, $0.5 million in payments on the Equipment Financing Facility and a $0.9 million increase in restricted cash.

Contractual Obligations

        See "Liquidity and Capital Resources" for a description of our contractual obligations under the Credit Agreement, Royalty Agreement and the Equipment Financing Facility.

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        The following table summarizes our contractual obligations as of March 31, 2015:

 
  Payments Due by Period  
 
  Total   Less Than
1 Year
  1 to 3
Years
  3 to 5
Years
  More Than
5 Years
 
 
  (In thousands)
 

Operating leases

  $ 3,694   $ 2,274   $ 1,420   $   $  

Long-term debt(1)

    20,000             20,000      

Other long-term debt(2)

    5,265     2,340     2,925          

Interest on long-term debt(3)

    7,694     2,068     3,730     1,896      

Inventory purchase commitments

    16,326     14,326     2,000          
                       

Total

  $ 52,978   $ 21,007   $ 10,075   $ 21,896   $  
                       
                       

(1)
Represents amounts payable under our Credit Agreement with ROS Acquisition LP.

(2)
Represents amounts payable under our Equipment Financing Facility with Comerica.

(3)
Interest payments on long-term debt are estimated based on: (a) the outstanding principal balance of the Credit Agreement, which was $20.0 million as of March 31, 2015, and (b) the outstanding principal balance on the Equipment Financing Facility of $5.3 million as of March 31, 2015. The interest rate for borrowings under the Credit Agreement is equal to the greater of LIBOR or 1% per annum plus the applicable margin of 8% per annum or 9% floor on the outstanding Credit Agreement balance plus royalty payments based upon projected revenues. Interest payments for borrowings under the Credit Agreement, in the table above, are estimated using Natera's March 31, 2015 rate of 9.0%, but excludes royalty payments due to the variability in future revenues. Interest payments on the Equipment Financing Facility are made monthly at the rate of 6.35% of the principal amount outstanding.

        The amounts in the table above do not include a purchase commitment entered into in January 2015 for a minimum of $5.3 million in connection with a laboratory services agreement which services are required to be rendered within 18 months starting from May 2015.

        The amounts in the table above do not include the obligation entered into in March 2015 for up to $6.75 million that we will be responsible to pay in connection with an agreement with a major manufacturer to develop a version of our Panorama test for use in a specific country, including the right to market and perform such test. The development and approval process is expected to take two to four years.

Operating Lease Obligations

        As of March 31, 2015, we sub-lease office facilities under non-cancelable operating lease agreements. In January 2013, we amended our sublease agreement to expand our corporate headquarters. In connection with the amendment, we executed a letter of credit in favor of the lessors for $0.8 million, which is secured with a restricted cash account.

        The related subleases expire in October 2016. On March 21, 2014, we entered into an additional sub-lease agreement to expand our San Carlos facilities for additional office and laboratory space. The lease and additional sub-lease expire in January 2017.

Inventory Purchase Obligations

        As of March 31, 2015, we have non-cancelable contractual commitments with Illumina, Inc. for approximately $16.3 million for inventory material used in the laboratory testing process. This represents binding and future minimum purchase obligations through September 30, 2016.

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Off-Balance Sheet Arrangements

        We have not entered into any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. Our Credit Agreement has an interest rate of 8% plus the greater of LIBOR or 1% on the principal outstanding. Our equipment financing facility has an interest rate of 3.10% plus the Prime Reference Rate. Both the LIBOR and Prime Reference Rate are variable. Such interest-bearing instruments carry a degree of risk; however, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

        Our operations are currently conducted primarily in the United States. As we expand internationally, our results of operations and cash flows may become subject to fluctuations due to changes in foreign currency exchange rates. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses will increase when translated into U.S. dollars. In addition, future fluctuations in the value of the U.S. dollar may affect the price at which we sell our tests outside the United States. To date, our foreign currency risk has been minimal and we have not historically hedged our foreign currency risk; however, we may consider doing so in the future.

JOBS Act Accounting Election

        We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act 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.

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BUSINESS

Overview

        We are a rapidly growing diagnostics company with proprietary molecular and bioinformatics technology that we are deploying to change the management of genetic disease worldwide. Our novel molecular assays reliably measure many informative regions across the genome from samples as small as a single cell. Our statistical algorithms combine these measurements with data available from the broader scientific community to detect a wide range of serious conditions with best-in-class accuracy and coverage. Our technology has been proven clinically and commercially in the prenatal testing space. We believe this success can be translated into the liquid biopsy space, and we are developing products for a number of oncology applications. In addition to our direct sales force in the United States, which we are continuing to expand, we have a global network of over 70 laboratory and distribution partners, including many of the largest international laboratories. We are enabling even wider adoption of our technology by introducing a global cloud-based distribution model. We have launched seven molecular diagnostic tests since 2009, and we intend to launch new products in prenatal testing and oncology in the future. In March 2013, we launched Panorama, our non-invasive prenatal test, or NIPT. Over 55,000 Panorama tests were accessioned during the three months ended March 31, 2015. Our revenues have grown from $4.3 million in 2010 to $159.3 million in 2014. Our net losses decreased from $37.1 million for the year ended December 31, 2013 to $5.2 million for the year ended December 31, 2014. Genetic inheritance is conveyed through a naturally occurring information storage system known as deoxyribonucleic acid, or DNA. DNA stores information in a linear sequence of the chemical bases adenine, cytosine, guanine and thymine, represented by the symbols A, C, G, and T. Billions of bases of A, C, G, and T link together inside living cells to form the genome, which can be read like a code or a molecular blueprint for life.

        While differences in the specific sequence and structure of this code drive biological diversity, certain variations can also cause disease. Examples of genetic diversity include copy number variations, or CNVs, and single nucleotide variants, or SNVs. A CNV is a genetic mutation in which relatively large regions of the genome have been deleted or duplicated, and an SNV is a mutation where a single base has changed. When single base changes are common in the population, that position on the chromosome is called a single nucleotide polymorphism, or SNP. When genetic variations are a cause of disease, such as Down syndrome or breast cancer, detecting them within the patient's tissue sample can enable diagnosis and treatment. Our goal is to develop and commercialize non- or minimally invasive tests for the highly reliable detection of variations covering a broad set of diseases.

        Our approach combines proprietary molecular biology and computational techniques to measure genomic variations in tiny amounts of DNA, as small as a single cell. Our molecular biology techniques allow us to target over 20,000 regions of the genome simultaneously in a single test reaction, without losing molecules by splitting the sample into separate reaction tubes, so that all relevant variants can be detected. We believe our approach, which we call mmPCR, or massively multiplexed polymerase chain reaction, represents a fundamental advance in molecular biology. To make sense of this deep and rich set of biological data and deliver a diagnosis, we have developed computationally intensive algorithms that combine the data generated by mmPCR with the ever-expanding set of publicly available data on genetic variations. We have optimized these algorithms to enable laboratories around the world to run diagnostic tests locally, and access our algorithms in the cloud.

        We have first applied our technology to prenatal testing, and we are leveraging our core expertise to develop blood-based diagnostic tests for cancer. In both prenatal testing and oncology, the use of blood-based diagnostic tests offers significant advantages over older methods, but the significant technological challenge is that it requires the measurement of very small amounts of relevant genetic material circulating within a much larger blood sample.

        In prenatal testing, our approach based on measuring thousands of SNPs simultaneously is fundamentally distinct from the approach employed in other commercially available NIPTs. Based on

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extensive data published in the journals Obstetrics & Gynecology, the American Journal of Obstetrics & Gynecology and Prenatal Diagnosis, we believe Panorama, our NIPT, is the most accurate NIPT commercially available in the United States.

        In oncology, we have demonstrated our ability to detect both CNVs and SNVs from very low concentrations of tumor DNA circulating in a blood sample. Because breast, ovarian and lung cancer are driven by both CNVs and SNVs, we believe that our approach is well-suited for early detection, recurrence monitoring and therapy selection for these cancers.

        We attribute our commercial success and future growth prospects to the following:

    Extensive expertise in both molecular biology and bioinformatics.  To achieve outstanding disease coverage and accuracy across multiple tests, molecular techniques must advance in tandem with statistical techniques. Our proprietary mmPCR technology allows us to target over 20,000 genomic variations simultaneously in a single test reaction. Our bioinformatics capabilities allow us to build billions of detailed models of the potential genetic states and compare them with known and measured genetic states of a target to determine the most likely diagnosis using a technique known as maximum likelihood Bayesian optimization. We believe that the power of these combined molecular and bioinformatics techniques provides us with our competitive advantage.

    Best-in-class performance and coverage.  From a single blood draw, our current commercial tests assess the risk of a broad range of conditions, which we refer to as "coverage," including common fetal aneuploidies, microdeletions, triploidy, and inherited genetic conditions that could be passed on from parent to child. A fetal aneuploidy is when a fetus has a different number of chromosomes than are typical. A microdeletion is a deletion of a region of DNA from one copy of one chromosome in an individual. Triploidy is when an individual has three copies of every chromosome instead of two. We estimate that all of these conditions combined are more than three times as prevalent in the general population as the three most common autosomal aneuploidies, which include trisomies 13, 18, and 21. In aggregated data from validation studies published in Obstetrics & Gynecology and Prenatal Diagnosis, Panorama has demonstrated combined sensitivity for the Down, Edwards and Patau syndromes and triploidy of greater than 99% and specificity of greater than 99.9% per disorder, which we believe makes Panorama overall the most accurate NIPT commercially available in the United States. In these studies, Panorama made no errors in fetal sex determination. A paper published in the August 2014 issue of Obstetrics & Gynecology reported that Panorama had a statistically significant lower false positive rate than the NIPT method practiced by our U.S. competitors. Our sensitivity for 22q11.2 deletion syndrome, which is caused by the deletion of a small piece of chromosome 22 and can be treated with early intervention at the time of birth to avoid seizures and reduce cognitive impairment, is greater than 95% for deletions of approximately 2.9Mb based on data published in the American Journal of Obstetrics & Gynecology. This sensitivity is considerably higher than that published for any competing microdeletions tests currently offered in the NIPT sector. Sensitivity is the likelihood that an individual with a condition will be correctly found to have that condition and is calculated as the ratio between the number of individuals that test positive for the condition over the total number of individuals in the tested cohort who actually have the condition. Specificity is the likelihood that an individual without a condition will be correctly found not to have that condition and is calculated as the ratio between the number of individuals that test negative for a condition over the total number of individuals in the tested cohort who do not have the condition.

    Independent sales force and global network of laboratory partners.  Our own direct sales force and managed care teams, both of which we have recently expanded, anchor our commercial engagement with physicians, laboratory partners, and payers. We can offer all of our products through our direct sales force and at a higher gross margin percentage than when we service customers through a partner. The percentage of our overall accessioned tests generated through the higher margin U.S. direct sales force increased from approximately 25% in 2013 to approximately 44% in 2014, and to

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      approximately 60% for the three months ended March 31, 2015. Where we have identified laboratory or distribution partners who share our focus on premium quality and service, we also contract with them to distribute our tests. We find this model to be particularly beneficial outside of the United States. Through our direct sales effort and worldwide network of over 70 laboratory and distribution partners, we have established a broad distribution channel that includes over 600 genetics-focused sales representatives. We and our laboratory partners have in-network contracts with insurance providers that account for over 140 million covered lives in the United States. Our target market for NIPT is a much smaller subset of these covered lives, because it excludes men, children and post-menopausal women who would not be users of our products. We are now a participating provider in 31 state Medicaid programs.

    Substantial intellectual property.  We have retained worldwide rights to our internally-developed molecular and bioinformatics technologies, with no royalty or licensing fee obligations on our core technologies. We have multiple issued patents covering aspects of our core technology in the United States and internationally. In prenatal testing, we believe our proprietary method represents a fundamentally differentiated approach.

    Cloud-based distribution model.  We are leveraging our cloud-based Constellation software to expand access to our molecular and bioinformatics technologies to laboratory partners worldwide. This approach allows us to scale more quickly, drive broader patient access, and leverage the rapid emergence of sequencing systems worldwide. We have begun using this distribution model with laboratories inside and outside the United States, for both commercial products and research applications. We also leverage Constellation to more efficiently perform our internal commercial laboratory activities and to perform research and development of our products. In July 2014, we achieved a CE Mark from the European Commission for Constellation and in May 2015, we achieved a CE Mark for the key reagent kits that our partners will need to run their portion of the Panorama test prior to accessing our cloud-based software. These two CE Marks enable our cloud-based distribution model in the European Union and other countries that accept a CE Mark. We are also engaged in discussions with the U.S. Food and Drug Administration, or the FDA, for use of a version of our software to support our cloud-based distribution model in the United States. The FDA has recently indicated to us that this software may be appropriate for review under the de novo classification process. The FDA has also stated to us that it will not prevent us from marketing the software in the United States while we continue to discuss how our software will be regulated and the FDA determines the regulatory pathway.

    Future applications of our technology connected with prenatal testing.  We expect to broaden our disease coverage in prenatal diagnostics, including by incorporating the ability to screen for additional disorders in our Panorama panel. We have substantial intellectual property covering the analysis of single cells, an approach we use to analyze embryos during in vitro fertilization, or IVF. We believe that this technology will allow us to capitalize on advances in isolating fetal cells from a mother's blood, which would allow us to measure more of the fetal genome non-invasively and with even higher accuracy. Furthermore, recent publications in Science and Genome Medicine highlight the capability of our technology to determine what segments of the parent's chromosomes contributed to the DNA of a fetus and hence to reconstruct almost the entire DNA of a fetus in silico using only measurements of a tiny amount of fetal DNA. Consequently, we believe that we will have the ability to generate close to the full genome of an individual, roughly 9 weeks after the individual is conceived. The applications of this information, from pregnancy through adulthood, are extensive.

    Future applications of our technology beyond prenatal testing.  We believe that our ability to reliably analyze DNA at many thousands of loci at the scale of a single-molecule is very well suited for the early detection and monitoring of a wide variety of cancers. We are working with some of the world's leading cancer centers to collect samples and develop so-called "liquid biopsy" tests to

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      analyze circulating tumor DNA of common forms of the disease, including breast, ovarian, and lung cancer. We believe that such tests will reduce the need for invasive tumor biopsies, enable earlier detection of cancer and enhance treatment.

Proprietary technology drives our test performance and pipeline

        Our intellectual property covers many proprietary methods for obtaining and analyzing genetic information, including, but not limited to, methods for multiplex PCR, enriching genetic material, single cell isolation and analysis, identifying chromosomal abnormalities in small or mixture samples of DNA where target DNA could be derived from a fetus or a cancer tumor, determining relational status of DNA such as for paternity testing, and estimating the fraction of target DNA in a mixture such as where the target DNA is from a fetus, a tumor or a rejected organ.

        The sensitivity, specificity and coverage of our tests are driven by our proprietary mmPCR method of amplifying the DNA in a sample, and by our bioinformatics algorithm, which relies on a statistical technique known as maximum likelihood estimation, or MLE. MLE is widely used in other industries to enhance the quality of noisy or complex data inputs, such as in the conversion of a transmitted analog communication signal to a digital format. We have applied MLE to high-throughput genetic data. Our molecular assays can multiplex over 20,000 primer sets in a single reaction well, which we believe is a fundamental innovation in molecular biology. In the case of Panorama, our molecular tests use mmPCR to run approximately 13,000 PCR primer sets in a single reaction. Each of these primers targets a region of the genome that varies between individuals. These variations are commonly referred to as single nucleotide polymorphisms, or SNPs. Our ability to multiplex this large number of primer sets in a single experiment allows us to achieve a high signal to noise ratio, or the ratio of useful information to irrelevant data, when detecting small amounts of DNA within a much larger sample. We have developed software tools for assay design that substantially streamlines our development process. When developing new diagnostic tests, we simply specify the genomic variations and copy number regions we are interested in detecting, and our bioinformatics algorithm generates the set of necessary primer designs to make an accurate measurement.

        In the case of Panorama, our bioinformatics algorithm generates billions of hypotheses about the potential genomic state of the fetus using maternal genetic information and publicly available data such as the HapMap database from the Human Genome Project, which indicates the probability of inheriting various blocks of genetic information from the parents. Specifically, our algorithm generates hypotheses about how many copies of a particular chromosome segment are in the fetus, and sub-hypotheses, which are hypotheses about the specific inheritance patterns, meaning which chromosome segments are inherited from each parent, including recombination, or the exchange of DNA within the parent chromosomes that occurs during the formation of the sperm and the egg that become the fetus. These hypotheses are then compared to the actual SNP measurements of the maternal DNA and fetal free-floating DNA, which is fetal DNA not contained within a cell, and a likelihood is calculated for each hypothesis. The hypothesis with the maximum likelihood predicts the genetic state of the fetus. Our bioinformatics algorithm applies MLE to combine the large and complex data generated from the patient sample with the growing body of publicly available genomic information.

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        The figure below describes the Panorama test process.

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        The analytic and clinical validity of our technology demonstrated in Panorama and our other products has been described in multiple peer-reviewed publications, including the journals Science, Human Reproduction, Molecular Human Reproduction, Fertility and Sterility, PLOS ONE, Genetics in Medicine, Prenatal Diagnosis, Fetal Diagnosis and Therapy, Obstetrics & Gynecology, Genome Medicine, and American Journal of Obstetrics & Gynecology.

Panorama: Applying our molecular technology and bioinformatics to prenatal diagnostics

        We launched Panorama in March 2013. Panorama non-invasively screens for fetal chromosomal abnormalities, including Down syndrome, Edwards syndrome, Patau syndrome, Turner syndrome and triploidy, which often result in intellectual disability, severe organ abnormalities and fetal demise. Panorama can be performed as early as nine weeks into a pregnancy, which is significantly earlier than traditional methods, such as serum protein measurement where doctors measure certain hormones in the blood.

        Based on data published in Prenatal Diagnosis, Fetal Diagnosis and Therapy and Obstetrics & Gynecology, Panorama demonstrated greater than 99% overall sensitivity for aneuploidies on chromosomes 13, 18 and 21 and triploidy and less than 0.1% false positive rate for each syndrome, which we believe makes it overall the most accurate NIPT commercially available in the United States. Sensitivity is calculated as the ratio between the number of individuals that test positive for the condition over the total number of individuals in the tested cohort who actually have the condition. A paper published in the August 2014 issue of Obstetrics & Gynecology, reported that Panorama had a statistically significant lower false positive rate than other NIPT methods practiced by our U.S. competitors. Based on data published in Obstetrics & Gynecology, Prenatal Diagnosis, and American Journal of Obstetrics & Gynecology, we have also demonstrated the ability to identify fetal sex more accurately than competing NIPTs. This is partially a result of Panorama's unique ability to detect a vanishing twin, which is a known driver of fetal sex errors with quantitative methods used by our competitors. The October 2014 issue of the American Journal of Obstetrics & Gynecology noted that the ability of Panorama to identify additional fetal haplotypes is expected to result in fewer false positive calls and prevent incorrect fetal sex calls.

        We believe Panorama's specificity and sensitivity reduce the need for unnecessary confirmatory invasive procedures, lowering the total cost to the healthcare system of these procedures and limiting the

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resulting risk of spontaneous miscarriage. We believe Panorama's test performance has allowed us to command a price premium compared to other NIPTs while achieving over 55,000 Panorama tests accessioned during the three months ended March 31, 2015. A test is accessioned when we receive the test, the relevant information about the test is entered into our computer system and the test sample is routed into the appropriate sample flow.

        In 2014, we enhanced Panorama by adding the capability to screen for five of the most common genetic diseases caused by microdeletions, using our Panorama microdeletions panel. The sensitivity, specificity, and positive predictive value, or PPV, of this test were described in a November 2014 publication in the American Journal of Obstetrics & Gynecology. PPV is the likelihood that a positive result on a test indicates a true positive result in the patient. Microdeletions are missing sub-chromosomal pieces of DNA, which can have serious health implications depending on the location of the deletion. Based on data published in Prenatal Diagnosis and American Journal of Obstetrics & Gynecology, the combined prevalence of these targeted microdeletions is approximately one in 700 pregnancies, which together makes them more common than Down syndrome for women younger than approximately 32 years of age. Unlike Down syndrome, where the risk increases with maternal age, the risk of these five microdeletions is independent of maternal age. Diseases caused by microdeletions are often not detected via common screening techniques such as ultrasound or hormone-based screening, yet the presence of a microdeletion can critically impact postnatal treatment. For example, when learning prior to the birth of a newborn with 22q11.2 deletion syndrome, or DiGeorge syndrome, doctors will know to deliver calcium to the infant to avoid seizures and permanent cognitive impairment and will know to avoid administering routine vaccinations due to the immunodeficiency frequently associated with this condition. Panorama has demonstrated best-in-class performance screening for microdeletions. In validation studies, Panorama achieved sensitivity greater than 95% for deletions of approximately 2.9Mb for the 22q11.2 deletion syndrome and has been validated to perform at low fetal fractions. The two other NIPTs currently screening commercially for this condition claim to have sensitivity of only between 60% and 87% and, further, have not demonstrated performance at low fetal fractions, where performance of NIPTs using the quantitative method has been found to suffer. In fact, a recent publication showed that one competitor's NIPT had a sensitivity for 22q11.2 deletion syndrome that fell below 20% when fetal fraction was below 10%, which represents approximately half of all patients seeking NIPT, based on data published in the American Journal of Obstetrics & Gynecology. For the three months ended March 31, 2015, approximately 83% of customers who ordered the basic Panorama panel directly from us have also ordered screening for 22q11.2 deletion syndrome or the full microdeletions panel. The Panorama microdeletions panel has conditional approval from the New York State Department of Health.

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        The graph below summarizes the incidence of genetic diseases for which prenatal screening is relatively common, as well as the incidence of genetic diseases caused by microdeletions that are screened by the Panorama microdeletions panel. Incidence rates are higher than that of many commonly tested disorders, such as cystic fibrosis and spinal muscular atrophy. Based on data recently published in Prenatal Diagnosis, the incidence rate of 22q11.2 deletion alone is over three times more common than cystic fibrosis.

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        The graph below demonstrates how the relative incidence of Down syndrome and genetic diseases caused by the microdeletions screened for by the Panorama microdeletions panel varies with maternal age.

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        Because the prevalence of microdeletions is independent of maternal age, it is more common at birth than fetal aneuploidies for children born to younger women. Therefore, we believe our microdeletions testing capability will be a significant driver of Panorama adoption in all risk categories, including those who are traditionally considered average-risk for Down syndrome. Based on the prevalence of these conditions in younger women and the performance of Panorama, we believe Panorama is the most appropriate cfDNA-based screening test for the growing NIPT market for average-risk pregnancies.

        In April 2015, we updated both the molecular and bioinformatics portions of Panorama. These updates both reduce the cost of running Panorama and further increase the sensitivity of the test, allowing it to run with lower fetal fraction input. These updates lead to a less frequent need to require blood redraws from the patient, while further improving performance. The cost savings comes primarily from a reduction in the number of molecular probes used from approximately 20,000 to approximately 13,000. This change, along with improved chemistry, reduces by roughly one third of the number of sequencing reads needed to yield the same quality of information as previously. In validation studies, the new process demonstrated overall specificity of 100% and sensitivity of 99.5%, including 99.4% for Down syndrome and 100% for Edwards, Patau and Turner's syndromes and triploidy. In addition, validation data of the new methods supports the conclusion that these improvements will meaningfully reduce the frequency of Panorama's failure to achieve a reportable result due to low fetal fraction.

Our comprehensive offering in women's health genetics and beyond, for doctors and laboratories

        Using the same blood draw taken for Panorama, we can also offer the Horizon carrier screening, or CS, panel, our inherited disease CS test. Horizon was created based on recommended screening guidelines from the American Congress of Obstetricians and Gynecologists, or ACOG, the American College of Medical Genetics and Genomics, or ACMG, and the Victor Center for the Prevention of Jewish Genetic Diseases. Our recently improved Horizon product has a basic panel that screens for 27 diseases, including cystic fibrosis, Duchenne Muscular Dystrophy, or DMD, spinal muscular atrophy, or SMA, and Fragile X syndrome. The updated Horizon also has multiple test panels with more diseases, including, in the near future, a panel with a total of more than 250 disorders to suit a patient's needs and family history. Horizon can be performed simultaneously with Panorama to significantly enhance the disease coverage of our NIPT offering for patients.

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        We have launched seven prenatal genetic tests since 2009, all of which are laboratory-developed tests, or LDTs, and in 2015, we launched Constellation, our cloud-based software product, which is helping to enable our cloud-based distribution model. The following table summarizes our commercial products launched to date.

Product
  Indication(s)   Year Launched   Description
Constellation Software   Any clinical or research application that involves analysis of copy number variants, or CNVs, and single nucleotide variants, or SNVs, in a DNA mixture   2015   Allows laboratory customers to gain access through the cloud to the same algorithms and bioinformatics that we use in our own laboratory, allowing for validation and commercialization of tests based on our technology, including NIPT.

Panorama Microdeletions Panel

 

22q11.2 deletion syndrome (DiGeorge syndrome)
1p36 deletion
Angelman syndrome
Cri-du-chat syndrome
Prader-Willi syndromes

 

2014

 

Screens free-floating fetal DNA from a maternal blood sample as early as nine weeks gestation for microdeletions associated with common syndromes that result in severe intellectual disability and moderate to severe physical disabilities.

Panorama Non-Invasive Prenatal Test (NIPT)

 

Trisomy 21 (Down syndrome)
Trisomy 18 (Edwards syndrome)
Trisomy 13 (Patau syndrome)
Triploidy
Sex chromosome trisomies
Monosomy X
Fetal sex

 

2013

 

Screens fetal free-floating DNA from a maternal blood sample as early as nine weeks gestation for instances of either extra or missing chromosomes of interest. Panorama can also identify fetal sex and if there are three sets of each chromosome, which is known as triploidy.

Multi-Disease Carrier Screening (CS) (recently rebranded as Horizon)

 

Cystic fibrosis
Spinal muscular atrophy
Fragile X syndrome (recently updated to include Duchenne Muscular Distrophy and will be able to screen for more than 250 conditions)

 

2012

 

CS test performed either before or during pregnancy for a large number of serious genetic disorders that could be passed on to the carrier's children.

Non-Invasive Prenatal Paternity Testing

 

Paternity

 

2011

 

Reliably indicates paternity from fetal free-floating DNA in a maternal blood sample, taken as early as nine weeks gestation, and a blood sample from the alleged father(s).

Products of Conception Testing (POC) (recently rebranded as Anora)

 

Post-miscarriage testing for all aneuploidies, triploidies, 1:3 tetraploidy, clinically significant deletions and duplications >1 Mb, and both single chromosome and complete uniparental disomy

 

2010

 

POC test developed specifically to identify fetal chromosomal causes of miscarriages using a SNP microarray.

Preimplantation Genetic Diagnosis (PGD) (recently rebranded as Spectrum)

 

Inherited diseases

 

2010

 

Spectrum PGD can test for specific genetic disease(s) that the couple is known to be at risk to pass on to their children and is performed in conjunction with PGS to identify and selectively transfer those embryos from an IVF cycle that are free from the genetic disease and also have normal chromosome results.

Pre-implantation Genetic Screening (PGS) (recently rebranded as Spectrum)

 

Extra or missing chromosomes and segmental deletions or duplications

 

2009

 

Spectrum PGS can inform clinicians and patients which IVF-created embryo samples have the correct number of chromosomes and are suitable for transfer and which ones have chromosomal abnormalities that would result in lack of implantation, miscarriage, or the birth of a baby with birth defects.

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        We have a direct sales force and managed care team and a global network of over 60 laboratory partners who market our test. Where our sales force can access physician offices directly, as in the U.S. market, we are able to maximize cross-selling opportunities by offering the full portfolio of our products. We also generate a higher gross margin when we sell testing services directly, compared to when our products are distributed by laboratory partners to be performed at our laboratory certified under Clinical Laboratory Improvement Amendments of 1988, or CLIA. The pie charts below show, from the three months ended March 31, 2014 to the three months ended March 31, 2015, the increasing shift in distribution of our products toward direct distribution.

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        We generate the highest gross margins on royalty revenue collected from laboratories that run tests in their own facilities and have the sequencing data analyzed by our Constellation software under our cloud-based distribution model. Currently, we have a non-invasive prenatal paternity test that is performed, marketed and sold exclusively through our cloud-based distribution model by a Constellation customer from whom we receive a royalty per test. In addition, we have recently executed a license agreement with Clarient Diagnostic Services, Inc., a division of GE Healthcare, one of the largest oncology laboratories in the United States. Under this license, Clarient, which processes approximately 10% of the cancer tumor samples in the United States, will develop an oncology test to support pharmaceutical clinical trials based on our technology and employing Constellation. We have also granted similar rights to one of the laboratories that is developing an NIPT test. We are in active discussions with many other potential partners in the United States and abroad to continue to grow our cloud-based distribution network.

Future applications of our technology connected with prenatal testing

        We intend to refine and expand our offering in prenatal diagnostics by leveraging our core technology and the data we gather as our sample volumes grow. For example, the microdeletion samples that we gather through Panorama NIPT or through Anora POC testing help us refine the algorithms that detect these anomalies, the exact genetic regions where these anomalies are sought, and the PPV with which they are reported. As another example, our expertise analyzing single fetal cells developed through our Spectrum products for IVF centers is informing our efforts to measure intact fetal cells and mixtures of fetal cells from a mother's blood draw. Non-invasive measurement of these single cells would enable us to potentially replace invasive confirmatory procedures, such as amniocentesis, over time.

        We believe that, in the future, our informatics technology will be used to generate a nearly full genome of an individual. Articles in the April 2015 issue of Genome Medicine and in the April 2015 issue of Science highlight the ability of our informatics technology to determine, from tiny amounts of DNA as

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small as single fetal cells, which chromosome segments from the parent contributed to the DNA of the fetus. This allows us to substantially reconstruct the genome of the fetus by sequencing the parents' genomes. We plan to combine this DNA reconstruction technique with a targeted panel, similar to our Panorama test with microdeletions but more extensive, to detect de novo genetic mutations such as CNVs, which are not inherited from the parents. This enhanced view of the near full genome, combined with knowledge of the parent DNA, has the potential to substantially impact the management of many aspects of an individual's health, from birth through adulthood. Future applications include prediction of disease susceptibilities and appropriate interventions, selection of drugs and drug dosages, nutrition guidance and many other emerging applications.

Our development pipeline in oncology diagnostics

        We believe that our ability to interrogate genes at tens of thousands of points in parallel in a single reaction at the scale of a single molecule is well suited to the analysis of cancer-associated genetic mutations in circulating tumor DNA, or ctDNA. In applications such as cancer therapy monitoring, cancer recurrence monitoring and early detection screening, thousands of loci, or genetic locations, must be interrogated simultaneously without splitting a sample, and sensitivity to tiny amounts of tumor DNA as low as a single molecule is crucial. We are developing a set of mmPCR panels to analyze ctDNA in plasma and identify SNVs, more commonly referred to as mutations, as well as CNVs. If development is successful, we expect to be able to commercialize these panels for the detection of or screening for multiple common forms of cancer, including breast, ovarian, and lung cancer, as well as to help select cancer therapies based on the mutation profile. We currently anticipate that we will initially commercialize these tests as LDTs. For the development of these products, we are working with world-renowned oncology centers, such as the Feinstein Institute for Medical Research at North Shore LIJ, Stanford University, Albert Einstein College of Medicine, Columbia University, Johns Hopkins University, Vanderbilt University and Cancer Research UK, on research collaborations, clinical trials and engaging with their leading doctors on our oncology advisory board.

        We have presented data we have generated on our core technology's proof-of-concept success at detecting cancer markers at low levels in tumors and in ctDNA at multiple conferences including the 2014 Annual Meeting of the American Society of Human Genetics, the 2015 Advances in Genome Biology and Technology Meeting, the 2014 San Antonio Breast Cancer Symposium, the Molecular Medicine Tri-Conference 2015, the 2015 ACMG, Annual Clinical Genetics Meeting and the International Molecular Diagnostics Europe 2015.

        We have demonstrated that our mmPCR platform can provide highly accurate detection of CNVs and SNVs in the plasma from patients with cancer, with sensitivities lower than 0.5% ctDNA for the detection of CNVs and approximately 0.01% ctDNA for the detection of SNVs. Our ability to simultaneously detect both CNVs and SNVs in ctDNA at very low concentrations in standard plasma samples drives our potential opportunity in the oncology diagnostics space. Because breast, ovarian and lung cancer are largely driven by CNVs, we believe that our ability to detect CNVs at low ctDNA levels will be well-suited for early detection, recurrence monitoring and therapy selection for these cancers.

        In preliminary experiments, using a non-optimized assay and mmPCR panel, we were able to detect SNV and/or CNV cancer signatures in the blood of: 92% of patients with cancerous lung nodules from stage IA through stage IIIA, 15 out of 17 of which were detected at stage I; 83% of patients with breast cancer tumors from stage I through stage III, 28 out of 35 of which were detected at stage I or II; and 100% of ovarian tumors at stage III. These results were achieved in all cases by analyzing only 5 regions for CNVs and, in the case of breast and lung cancer, a panel of SNVs developed from publicly available data such as the Cosmic database. Because the tumors had been previously-identified in these patients, we used an approach to detect CNVs that would be used in the context of recurrence monitoring. We are currently developing a set of mmPCR panels, using publicly available data such as Cosmic and The Cancer Genome Atlas in combination with our own samples, that will cover an even greater portion of disease load and are suited for screening, reflex testing and recurrence monitoring.

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        We expect that our focus on the detection of somatic SNV and CNV mutations at low concentrations in ctDNA will provide increased accuracy compared to many protein-based biomarkers and other methods currently used for non-invasive screening for cancer. We intend to change the paradigm of earliness of detection, sensitivity and specificity, as we have done for non-invasive prenatal testing. The standard of care screening tests for the types of cancers for which we have products in development are listed below and have the indicated specificities and sensitivities:

Type of Cancer
  Standard of Care Screen   Specificity   Sensitivity

Ovarian

  TVUs/CA-125   95%   20–57%

Lung

  Low Dose Cat Scan   73%   94%

Breast

  Mammography   89–91%   63–69%

        In contrast, our goal is to achieve specificities in the range of 99% to 99.9% and sensitivities in the range of 95% to 99% for the screening tests that we are developing for these cancers.

        Protein-based biomarkers found in the blood of individuals with cancer are also found, albeit at lower levels, in the blood of healthy individuals as well as in the blood of individuals with benign masses. In contrast, cancer-associated somatic CNVs and SNVs are only thought to be present in the blood of individuals with cancer. Consequently, we believe our approach for the non-invasive detection of cancer will provide a high sensitivity and specificity result for individuals tested, in contrast to ambiguous and difficult to interpret risk scores that are typically produced from protein-based tests.

        The mmPCR panels may be used both to detect variants at low levels in tumor samples as well as to detect variants in cell-free DNA. After comparison with other cell-free DNA technologies, our mmPCR technology was selected for use in Cancer Research UK/University College London's TRACERx clinical trial (enrolling up to 850 patients with lung cancer) for the multi-year monitoring of patient-specific SNVs in plasma, to understand the evolution of cancer mutations over time, and to monitor patients for disease recurrence.

        Based on the promise of our technology, we are currently developing non-invasive oncology diagnostic products to address several markets:

    Ovarian Cancer

    Reflex test.    Suspected ovarian cancer is a common problem that affects women. In the United States, a woman has a 5–10% chance of undergoing surgery for a suspected ovarian tumor, while only 13–21% within that group will actually receive a diagnosis of ovarian cancer. Our ovarian cancer reflex test is being designed for patients who have had a cyst identified, to provide an alternative to invasive biopsy with a highly accurate prediction of the presence of cancer.

    Early detection and recurrence monitoring.    We are targeting a product profile of twice-annual blood draws for patients at high risk of ovarian cancer based on family history or genetic susceptibility, while achieving sensitivity and specificity better than transvaginal ultrasounds, or TVUs, the current standard of care. In order to monitor patients who have been treated with ovarian cancer, the same panel may be used to monitor patients for potential signs of recurrence across many CNVs and SNVs.

    Breast Cancer

    Early detection monitoring and recurrence monitoring.    We are seeking to provide early detection monitoring for women who are at high risk for breast cancer and recurrence monitoring for women who have been treated for breast cancer and are in remission, each using twice annual blood draws. The mmPCR panel will consist of many SNVs and CNVs.

    Lung Cancer

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      Reflex test.    Our product will look for ctDNA in the blood of patients who have had lung nodules discovered by a low dose computerized tomography, or LDCT, scan. Our product-in-development has the potential to reduce the need for invasive follow-up, as well as the incidence of patients having a false positive indication of cancer. LDCT has specificity of only 73.4% for detecting cancerous nodules.

      Early detection monitoring.    We are seeking to develop a test to provide early detection of lung cancer in patients identified to be at high risk, such as smokers.

      Disease load monitoring.    For patients who have previously been diagnosed with lung cancer, this test would monitor disease load through non-invasive testing of the blood.

    Various Cancers

    Therapeutic Monitoring.    To assist in therapeutic decision making, we are developing a panel covering over 50 genes which will address currently known mutations that may affect therapy selections for a range of cancers based on increased resistance or susceptibility to particular drugs. The panel may be used both to detect variants at low levels in tumor samples as well as to detect variants in ctDNA.

    Custom Panels for Pharmaceuticals:    We intend to provide custom services for pharmaceutical and research entities for targeted assay design and bioinformatics interpretation. Custom panels may be designed for regions of interest in various research applications such as variant discovery and mechanism of action studies, among others, and clinical applications in diagnostics and therapeutics.

    Residual Disease Monitoring.    To guide prognosis, predict relapse and assist in therapeutic decision-making, we are developing a panel which will include known recurrent alterations that when identified in blood at low level may indicate a residual presence of cancer that also can remain in the patient after definitive treatment and during remission. The panel will be used to detect variants from the initial tumor's molecular signature in ctDNA in plasma that may occur at low levels in blood prior to the appearance of clinical symptoms and that may assist in guiding earlier decisions regarding clinical management.

        We currently anticipate that these tests will be initially commercialized as LDTs. Beyond the products we develop ourselves, in order to access the many opportunities in oncology, we plan to offer our automated mmPCR design tool as a service to researchers and CLIA-certified laboratories, allowing them to design their own oncology diagnostics assays and perform their own studies using our Constellation cloud software.

Industry Overview

Growth in Next Generation Sequencing and Genetic Testing

        Every individual has a unique genome and we believe that comprehensive knowledge of this genetic makeup is becoming integral to the practice of medicine. We also believe that eventually many individuals in a modern healthcare system will have their genome sequenced at birth, resulting in the potential for dramatic improvements in health and an overall reduction in healthcare costs through preventive care and better disease management. The ability to identify the presence of diseases early, easily, and inexpensively has the potential to impact the lives of millions of patients and save billions of dollars in healthcare costs. The rapid expansion of next-generation sequencing, or NGS, of DNA has unlocked a wealth of information about the role of genomics in disease, and is enabling a new class of diagnostic tests that improve patient care. In the same way that the doubling of transistors on an integrated circuit approximately every two years as described by Moore's Law has enabled an accelerating pace of computing power per dollar and innovation in information technology, we believe NGS technology is driving a similar advance in the understanding of genetic disease because NGS technology parallelizes the sequencing

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process and produces millions of sequences concurrently. According to the National Human Genome Research Institute, the cost of sequencing a human genome has fallen from $3 billion in 2004, to $10 million in 2007, to as little as $1,000 today. As of May 2015, genetests.org estimated that there were more than 44,000 different genetic tests available from over 650 laboratories. As the cost and performance of next-generation sequencers continues to improve, we expect availability and demand for molecular diagnostic tests will continue to accelerate.

The prenatal genetic testing market has rapidly adopted sequencing-based diagnostic tests

        In prenatal diagnostics, NIPTs use NGS to screen for chromosomal abnormalities, such as Down syndrome, by measuring fetal DNA circulating in the bloodstream of an expectant mother. According to the U.S. Centers for Disease Control and Prevention, or CDC, in the United States in 2013 there were approximately four million births, which included over 600,000 births resulting from pregnancies that were considered high-risk. Additionally, we estimate that there are over 12.5 million annual births in developed countries, including in the United States, and over 16 million in China that fit our addressable market. We believe that the total addressable markets annually for our NIPT product and carrier screening product in the United States alone are approximately $2.5 billion and $2.0 billion, respectively. With traditional prenatal screening of hormone-based biomarkers in serum, roughly one in six pregnancies with a chromosomal abnormality will screen negative on hormone tests, and only one in twenty who screen positive on hormone-based tests will actually have an affected pregnancy. Since invasive testing such as amniocentesis, which is recommended to confirm a screening result, can result in fetal loss in as many as one in 300 procedures, patients and physicians have been eager to adopt more precise screening methods. The first generation of NIPTs introduced in 2011 and 2012, which relied on NGS equipment and quantitative methodology, offered a significant improvement in care compared to the older hormone-based biomarkers. In December 2012, ACOG issued guidance recommending non-invasive prenatal testing for women at high risk of carrying an aneuploid fetus. ACOG and the Society for Maternal Fetal Medicine, or SMFM, issued new guidelines for NIPT on June 26, 2015, stating that conventional screening methods, rather than NIPT, remain the most appropriate choice for first-line screening for average-risk pregnancies, although all women should be informed of NIPT, among other options, including the option of no testing, and any woman may choose NIPT as a screening strategy, regardless of her risk status. See "Business—Sales and Marketing—Importance of Professional Societies and Patient Advocacy Groups."

First-generation NIPTs have limitations in accuracy and scope

        The first generation of NIPTs rely on quantitative methods, which simply measure the amount of DNA, to predict chromosomal abnormalities. All of our current competitors in the United States rely on this technique. These tests provided a valuable addition to older diagnostic techniques. However, they generally offer varying levels of sensitivity and specificity for whole chromosomal abnormalities, and we believe they are not well-suited for screening for many severe yet relatively common genetic disorders, such as microdeletions. These tests amplify fetal DNA circulating in the mother's blood either by amplifying all the DNA of the sample or by a targeted approach which focus on specific loci. They then employ NGS or microarrays to count the number of DNA sequences arising from a target chromosome and compare the amount of DNA detected to a reference chromosome in the sample which is assumed to have the normal two copies. If the amount of DNA detected from the target chromosome exceeds an expected amount derived from the reference chromosome, these tests return a positive result indicating a risk of aneuploidy of the target chromosome.

        Certain chromosomes, however, amplify inconsistently or generate variable amounts of DNA in the plasma, leading to variability in the comparison between the reference chromosome and the target chromosome. This can often lead to an inaccurate result using quantitative methods. For instance, the quantitative approach can detect trisomy 21, also known as Down syndrome, with greater than 95% sensitivity, but this method has been shown to be less effective at detecting trisomy 13, also known as Patau syndrome, and sex chromosomal abnormalities, and cannot detect triploidy, where the fetus has three

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copies of each chromosome. Quantitative methods may also produce false positive results from a vanishing twin, where a fetal twin spontaneously terminates often due to an aneuploidy, leaving residual genetic material in the maternal blood stream. Since quantitative methods do not differentiate between maternal and fetal DNA, they also produce false results caused by genetic anomalies on the mother's DNA, such as maternal mosaicism or deletions or duplications that are present on the mother. A set of such cases were described in the March 2015 issue of the New England Journal of Medicine. A paper published in the August 2014 issue of Obstetrics & Gynecology, reported that Panorama had a statistically significant lower false positive rate than the NIPT method practiced by our U.S. competitors. NIPTs using the quantitative method also have been shown to be ill-suited to address the needs of patients with low fractions of free-floating fetal DNA. For example, a 2011 study published in Genetics in Medicine found that the detection rate of trisomy 21 provided by a quantitative-method NIPT is reduced to 75% when fetal fractions are below 8%. We believe that approximately 25% of pregnancies are affected by such levels of fetal fractions during the first trimester.

        Quantitative methods have demonstrated relatively poor performance at detecting microdeletions, such as 22q11.2 deletion syndrome, on which physicians and patients are increasingly becoming focused. A study in the New England Journal of Medicine found microdeletions or duplications in 1.7% of all pregnancies, indicating substantially higher prevalence rates than common fetal aneuploidies in the general population.

Improved Understanding of the Role of Genetics in Disease

        The proliferation of genetic measurement technology is driving a parallel increase in information on the genetic underpinnings of diseases both within and outside the prenatal space. For example, the Cosmic Database at the Sanger Center in Cambridge, United Kingdom is a public database of known genetic mutations in cancer, which is frequently updated as new studies are conducted. The database was launched in 2004 with data from four genes known to be mutated in cancer, and has since grown to document over 18,000 genes from millions of experiments across the world on hundreds of thousands of tumors. For many cancers, the mutations described in this single database account for over 90% of the disease load. As the scientific community's understanding of cancer accelerates, we believe technologies that enable the precise and efficient measurement of mutated fragments of DNA are well positioned to translate this information into diagnostic tests that improve patient care.

Overview of Genetic Testing in Cancer

        Cancer remains one of the greatest areas of unmet medical need despite decades of advancement. The diagnosis of cancer is complex and multi-dimensional. Practicing oncologists order multiple tests, including currently available molecular diagnostic tests, to better understand the genomic alterations that are driving their patients' cancer growth. We believe that clinical molecular diagnostics for cancer is driving significant growth in the global market for molecular diagnostic tests. These tests can identify a person's predisposition to a particular disease (predictive testing), detect whether a person has a disease (diagnostic testing), predict the potential effectiveness of a therapy or drug (therapeutic monitoring), or assess risk of disease progression (prognosis) or recurrence (recurrence monitoring). Currently, many of these tests require a tissue sample, which often necessitates an invasive procedure.

        Despite the discovery in the 1990's that tumors continually shed their unique genomic material into a patient's bloodstream, the genomic "signals" are too weak for current genomic analysis technologies to detect such signals reliably or before patients have a terminally high tumor burden. New genomic analysis technology is enabling the development of products for the early detection and monitoring of cancer. These "liquid biopsies" provide genetic insights into a patient's cancer from easy to collect fluids such as blood rather than relying on tissue obtained from surgical biopsies.

        The potential market opportunity for "liquid biopsies" in cancer focused on therapeutic monitoring, recurrence monitoring and diagnosis is significant and has the potential for broad applicability across a

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variety of tumor types. The American Cancer Society estimates that in 2015, there will be approximately 1.7 million new cancer cases diagnosed and more than 575,000 cancer deaths in the United States. We estimate that: