S-1 1 grails-1.htm S-1 Document

As filed with the Securities and Exchange Commission on September 9, 2020
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GRAIL, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware807147-5117880
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
1525 O’Brien Drive
Menlo Park, California 94025
(650) 542-0372
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Hans E. Bishop
Chief Executive Officer
GRAIL, Inc.
1525 O’Brien Drive
Menlo Park, California 94025
(650) 542-0372
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies to:
W. Alex Voxman
Cheston J. Larson
Brian J. Cuneo
Latham & Watkins LLP
355 South Grand Avenue # 100
Los Angeles, CA 90071
(213) 485-1234
Marissa Lee Song
General Counsel & Corporate Secretary
GRAIL, Inc.
1525 O’Brien Drive
Menlo Park, California 94025
(650) 542-0372
Kevin P. Kennedy
Simpson Thacher & Bartlett LLP
2475 Hanover Street
Palo Alto, California 94304
(650) 251-5000
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. ☐
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☒Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
CALCULATION OF REGISTRATION FEE
Title Of Each Class Of
Securities To Be Registered
Proposed
Maximum
Aggregate
Offering Price(1)(2)
Amount Of
Registration
Fee
Common stock, par value $0.001 per share $100,000,000$12,980
(1)Includes the aggregate offering price of additional shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS (Subject to Completion, Dated September 9, 2020)
      Shares
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COMMON STOCK
GRAIL, Inc. is offering            shares of its common stock. This is our initial public offering, and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $           and $           per share.
We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “GRAL.”
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and may, therefore, elect to comply with reduced reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 16.
PRICE $           A SHARE
Price to Public
Underwriting Discounts and Commissions(1)
Proceeds to GRAIL
Per Share$$$
Total$$$
______________
(1)See “Underwriting” for a description of the compensation payable to the underwriters.
We have granted the underwriters the right to purchase up to           additional shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers on or about                        , 2020.
MORGAN STANLEYGOLDMAN SACHS & CO. LLCBofA SECURITIES
COWENEVERCORE ISI
                                                                      , 2020


TABLE OF CONTENTS
In this prospectus, “GRAIL,” the “Company,” “we,” “us,” and “our” refer to GRAIL, Inc. and, as appropriate, its consolidated subsidiaries. We and the underwriters have not 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 us or on our behalf. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial condition, results of operations, and future growth prospects may have changed since that date.
“GRAIL,” the GRAIL logos, and other trade names, trademarks, or service marks of GRAIL appearing in this prospectus are the property of GRAIL. Our application to register the “Galleri” mark and logo and some of our applications to register the “GRAIL” mark and the logos associated with GRAIL in the United States and other countries are pending. Other trade names, trademarks, or service marks appearing in this prospectus are the property of their respective holders. Solely for convenience, trade names, trademarks, and service marks referred to in this prospectus appear without the ®, ™ and SM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trade names, trademarks, and service marks.
Until          , 2020 (the 25th day after the date of this prospectus), 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.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our audited consolidated financial statements and unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision.
GRAIL, INC.
Our mission is to detect cancer early, when it can be cured.
Despite decades of effort, a war on cancer, the genomic revolution, dramatic biotechnology interventions, and the recommendation to screen for five cancers, cancer is projected to become the world’s leading killer by 2021. Most cancers are still diagnosed too late, predominantly because we lack recommended screening tests for most types of cancers, which are responsible for 71% of cancer deaths. Cancer is a disease of the genome, and while the human genome project deciphered the living human code two decades ago and ushered in the genomic revolution, it has previously not been applied to diseases that can significantly impact the population as a whole.
We are a healthcare company focused on saving lives and improving health by pioneering new technologies for early cancer detection. We have built a multi-disciplinary organization of scientists, engineers, and physicians and we are using the power of next-generation sequencing (NGS), population-scale clinical studies, and state-of-the-art computer science and data science to overcome one of medicine’s greatest challenges. Using our platform technology, we have developed a multi-cancer early detection blood test that has demonstrated in clinical studies the ability to detect more than 50 types of cancer, across all stages, and localize the cancer signal with a high degree of accuracy, from a single blood draw. We believe that our multi-cancer early detection test can lead to a dramatic increase in early cancer diagnosis. Based on our own calculations using 2006 to 2015 data from the Surveillance, Epidemiology, and End Results Program of the U.S. National Cancer Institute (SEER) and our own performance data, we believe that using our multi-cancer early detection test in conjunction with the five existing recommended screenings in the United States could avert many deaths by earlier detection of up to 75% of cancers with less than a 50% five-year survival rate.
Our multi-cancer early detection test, Galleri, is designed as a screening test for asymptomatic individuals over 50 years of age. We plan to commercially launch Galleri in 2021 as a laboratory developed test (LDT). In addition to Galleri, we are utilizing our proprietary technology platform and population-scale studies from which Galleri was developed to introduce additional products that address significant unmet medical needs, including a diagnostic aid for cancer test (DAC). DAC is designed to accelerate diagnostic resolution for patients for whom there is a clinical suspicion of cancer. We plan to commercially launch DAC after Galleri in the second half of 2021 as an LDT. We are also developing a minimal residual disease (MRD) test, designed to enable blood-based detection with or without tissue, and without the need for a personalized assay, as well as other post-diagnostic applications.
In developing Galleri, we undertook a rigorous, comprehensive, multi-omic discovery approach to explore and identify the most promising biological hallmarks of cancer. We have invested significant capital and resources in our foundational studies, which have collectively enrolled approximately 115,000 participants, to build what we believe are the largest linked datasets of genomic and clinical data in the cancer field. As of August 31, 2020, we have reported clinical study data using samples from approximately 9,500 participants. We applied machine learning analytics to these data and objectively investigated various scientific approaches to determine the optimal means of detecting cancer. We compared the performance of three different NGS approaches—mutations, chromosomal alterations and methylation patterns—in head-to-head studies. While all of the markers were capable of detecting cancer, we found that methylation profiling yielded significantly better results for cancer detection than was observed by interrogating mutations or chromosomal alterations, alone or in combination. In contrast to typical cancer mutations that only affect a handful of genomic locations, there are nearly 30 million methylation sites across the human genome, making them a ubiquitous and rich signal for detecting cancer.
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After comprehensive analysis of whole-genome methylation patterns, we discovered highly informative and low-noise methylation regions for cancer signal detection and localization. This led to our development of a targeted methylation approach that had superior performance and lower costs compared to whole-genome methylation. Our targeted methylation approach helps solve a core problem in detecting cancer early in asymptomatic individuals, which is the low level of cancer signal circulating in the blood. While methylation profiling is the approach we are using with Galleri, we continue to evaluate multi-omic approaches including evaluation of additional analytes and biofluids.
We believe that we have an unprecedented opportunity to transform cancer care and establish a market leading position for Galleri. Initially, we plan to target the following key channels in the United States: large, self-insured employers; physician-directed channels, including concierge practices and executive health programs; and progressive, integrated health systems. These channels represent a significant segment of the overall early detection market of 107 million individuals between the ages of 50-79 in the United States.
Our multi-cancer early detection test – Galleri
We believe our first anticipated commercially available product, Galleri, has the potential to transform cancer care and population health. We anticipate the commercial launch of Galleri as an LDT in 2021. In a clinical study, an earlier version of Galleri identified over 50 types of cancers, over 45 of which lack recommended screenings. Data showed that when our test detected a cancer, it was also able to localize the cancer signal with high accuracy. In the second sub-study (CCGA-2) of our foundational Circulating Cell-Free Genome Atlas Study (CCGA), when a cancer signal was detected, an earlier version of Galleri localized the cancer signal in 96% of the samples, and of these, Galleri correctly localized the cancer signal in 93%. Early data also suggested that indolent cancers are unlikely to be detected by Galleri, potentially reducing the problem of treating over-diagnosed cancers.
The most pressing unmet need in cancer early detection is to identify cancers for which there are no existing recommended screening tests. Galleri is designed to detect unscreened cancers and to complement the United States Preventive Services Task Force (USPSTF)-recommended screenings (specifically, lung for high-risk smokers, breast, cervical, prostate, and colorectal cancers have recommended screenings). Because the risk of cancer increases significantly after age 50, we expect the use of Galleri to be concentrated in an elevated risk population, for example, in individuals over the age of 50, when the risk of cancer increases significantly.
The sensitivity, true positive rate, specificity, and true negative rate of a test, together with the prevalence of disease in the population, enable a calculation of positive predictive value (PPV). PPV is the percentage of participants with a positive test result who truly have the disease, and we believe it is the most clinically relevant metric for a multi-cancer screening test, as physicians are unaware of a patient’s cancer status when test results are returned. Data from CCGA-2, using an earlier version of Galleri, showed the following performance data that were published in the Annals of Oncology in March 2020. CCGA-2 included approximately 6,700 total participants across validation and training sets.
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In those over age 50, Galleri demonstrated a 66% detection rate of Stage II cancers for which there are no current recommended screenings. We believe Galleri could be integrated directly into the existing healthcare pathways delivered to 40 million patients a year who are already going to a physician for their standard-of-care cancer screening.
We have developed a cancer epidemiology forecast model to estimate the potential impact of multi-cancer early detection testing on cancer stage shift and mortality reduction. Based on the performance of Galleri in our CCGA-2 study and using 2006 to 2015 data from SEER, our model estimates that by adding Galleri to diagnosis by usual care, there is potential to detect nearly 70% of cancers resulting in death within five years at an earlier stage (excluding cancers that grow too quickly to be detected by any screening program), which would translate to the potential to avert 39% of the deaths expected if not for early detection by Galleri.
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We believe Galleri has the potential to dramatically increase population early cancer detection, reducing the attendant morbidity, mortality and costs of late-stage cancer diagnoses. It has been estimated that a 1% reduction in cancer mortality in the United States would be worth $695 billion in today’s dollars from increased quality of life, productivity and survival. This estimate does not include intangible benefits such as the decreased emotional burden to family, friends and caregivers.
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By detecting unscreened cancers early and potentially averting deaths, we believe the clinical and economic utility of Galleri will support its commercial adoption. Our market research indicates that there is a significant addressable market opportunity we can access even before approval under traditional fee-for-service Medicare reimbursement. While such approval would be needed for broad-based adoption, we expect such approval will take several years to obtain, if at all. In the interim, we will pursue our initial market representing a significant segment of the overall early detection market of 107 million individuals between the ages of 50-79 in the United States. Specifically, we plan to target the following key channels:
•Large, self-insured employers (estimated total addressable U.S. market: 24 million people). We are targeting self-insured employers with an estimated market of approximately 24 million people over the age of 50 in the United States. Many of these are companies known to offer compelling and innovative health care offerings as part of a way to attract and retain employees.
•Progressive, integrated health systems (estimated total addressable U.S. market: 27 million people). By detecting cancer earlier, Galleri has the potential to improve population health. Many of the nation’s premier healthcare institutions have robust programs in population health management and precision medicine. We believe these programs lend themselves to innovative partnerships with us. In addition, by detecting more cancers, we believe health systems would not only have the potential benefit of improved health for patients but could also gain revenue from diagnostic workup and treatment of the detected cancers.
•Physician-directed channels, including concierge practices and executive health programs (estimated total addressable U.S. market: 1 million people). We believe Galleri could be compelling to physicians whose clients are focused on preventive health and wellness and have the financial means to enroll in these programs. The physician practices we are targeting are known to offer innovative, cutting-edge health offerings and market research suggests the members are willing to invest in differentiated and leading healthcare. We believe there are approximately 1 million people in the United States who have a concierge doctor or participate in an executive health program.
We believe there is a significant opportunity to improve the current cancer diagnosis journey for patients and we designed the Galleri testing process to be easy to use for physicians and patients. For patients who receive a “no cancer signal detected” result, our simple test report will remind individuals to continue with their standard-of-care cancer screenings. For those with a “cancer signal detected” result, our test report provides predicted tissue localization which is designed to help physicians determine the appropriate diagnostic workup. We are working with study investigators, key opinion leaders and clinical advisors to develop clear care pathways to help guide diagnostic workups. At commercialization, to support our large self-insured employers, we plan to have entered into agreements with a telemedicine provider that can order Galleri for employees when deemed medically appropriate by such provider and a phlebotomy partner to help support sample collection.
We plan to utilize data from our third sub-study of CCGA (CCGA-3), which has completed enrollment and is in ongoing follow-up, and our ongoing PATHFINDER study to help validate the version of Galleri that we plan to launch as an LDT. We expect to complete these activities in 2021, although a significant delay in the enrollment of PATHFINDER could delay our anticipated launch. Following the launch of Galleri as an LDT, we plan to submit a premarket approval application (PMA) of a subsequent version of Galleri in as early as 2023. We anticipate using a subset of data from the STRIVE study, along with other data, in support of the application.
Diagnostic Aid for Cancer Test
Every year in the United States, more than 12 million patients are subject to potentially invasive and time-consuming diagnostic workups. We estimate 2.4 million of these patients are already referred to a specialist doctor for a cancer diagnostic workup, and this represents our initial addressable market in the United States. Many of these patients, particularly those with non-focal symptoms, undergo several months of tests before they receive a cancer diagnosis. Our engagement with physicians indicates they would value tools to help triage cases with non-localizing concerning signs and symptoms, equivocal imaging or lab findings, where biopsy may be challenging due to anatomy or concurrent medical conditions, or where there has been other failure to make a diagnosis. To accelerate
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diagnostic resolution for patients with a clinical suspicion of cancer, we are developing DAC to help physicians achieve resolution quickly and cost effectively. We presented early data on an investigational version of DAC at the American Association for Cancer Research (AACR) Virtual Annual Meeting in April 2020, which showed that DAC’s specificity, sensitivity and ability to identify the location of the cancer signal was comparable to overall CCGA-2 performance. We plan to initially focus our commercial efforts on specialist physicians (such as pulmonologists, gastroenterologists, otolaryngologists, and hepatologists) and suspicion of cancer clinics. We expect to launch DAC as an LDT in the second half of 2021 after our launch of Galleri.
In addition, we estimate more than 10 million of the over 12 million patients that are subject to potentially invasive and time-consuming workups present with non-specific signs and symptoms to primary care physicians. There are numerous causes for these symptoms, including cancer, and some primary care physicians either initiate diagnostic odysseys or refer these individuals to specialists. We believe DAC would be a useful aid to help primary care physicians better determine next steps. To support our launch of DAC as an LDT, we plan to validate our test using samples from our CCGA study, which has completed enrollment and is in ongoing follow-up. We plan to conduct additional clinical studies in individuals with concerning non-specific symptoms, but who are not currently indicated for a cancer workup, in an effort to expand the adoption of DAC in this population. We anticipate initiating this study in the first half of 2021, and subject to favorable results, we expect potential uptake of DAC in this expanded patient population as early as 2023.
Future product opportunities
Minimal residual disease and recurrence monitoring
We believe that our technology platform could address current challenges with MRD testing, which is used in pharmaceutical trials and clinical settings to detect the presence or absence of residual disease and inform treatment decisions, including identifying patients who may be eligible for adjuvant therapy. The majority of currently available tests require tissue samples, and processing times can take over three weeks, and may require development of complex and time-consuming patient-specific assays.
We believe our technology could enable a blood-based MRD detection solution without the need for a personalized assay for reduced operational complexity and delivery of results in approximately 10 days. Because sensitivity in this setting is critical, we are developing a flexible approach to perform personalized analysis that can be informed by a baseline plasma sample or tissue, if available. We believe that this approach could provide comparable sensitivity to current bespoke assay approaches and potentially provide us with a timing and complexity advantage. We have not validated our MRD test and will need to conduct clinical studies in order to do so. We are seeking to validate the performance of our test in MRD settings in collaboration with pharmaceutical partners and we anticipate reporting data from these initial studies in the first half of 2021.
Patients with cancer, primary or metastatic, following completion of therapy, often require monitoring for possible progression. Many metastatic patients may remain on maintenance therapy during the remainder of their lives or are routinely monitored for cancer recurrence. We believe our MRD test could also help monitor for early signs of cancer recurrence in cancer survivors. Recurrence monitoring can be used to identify signs of early progression as well as therapeutic response or non-response and to guide further workup of the patient. Often patients are monitored with imaging or other modalities that may not detect recurrence as efficiently as a blood test due to both imaging intervals and insensitivity for very small tumors. Following a potential launch of our MRD test, we plan to develop a recurrence monitoring and therapy response test to serve this market, which we estimate to include over 16.9 million cancer survivors in the United States.
Potential enhancements to Galleri and DAC
We seek to continually enhance the performance and features of our tests, and invest in enhancing our core targeted methylation platform through improvements designed to achieve higher efficiency and scalability. We also aim to further improve the sensitivity of our tests by obtaining deeper coverage and a better understanding of noise and leveraging even larger datasets to further develop our advanced biologically directed machine learning algorithms.
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Beyond improvements to our methylation technology, we also continue to research and develop multi-omics technologies that have the potential to complement methylation through orthogonal biological information, including additional analytes and biofluids, such as RNA and urine. We believe RNA may provide an additional unique opportunity to detect cancer signals, predict the tumor tissue of origin, and determine the cancer subtype. As a result, we have developed a targeted cell-free RNA (cfRNA) assay to study a panel of biomarkers for breast and lung cancers and evaluate their potential to complement methylation. In an early study, data suggested that cfRNA could help detect signals for early stage hormone-receptive positive (HR-positive) breast cancer and lung adenocarcinoma patients missed by methylation in a small cohort of commercially-sourced samples. We have developed an early platform for extraction of cfNA from urine that is compatible with processing through our targeted methylation platform. This will allow us to evaluate the potential of our technology to increase tumor fraction and improve sensitivity of certain urologic cancers.
Capabilities and future research
We will continue to take a comprehensive, rigorous, and multi-omics approach to discovery and research. By using our large linked datasets of clinical and genomic data, we believe our multi-omics technology platforms, including, for example, our technology related to interrogating mutations, chromosomal alterations and RNA, could generate additional product opportunities, including for diseases other than cancer. We plan to augment our existing data sets with additional clinical trials and studies over time as well as data obtained through commercial use of our tests and our patient registry. We believe these additional datasets could potentially drive improved performance and functionality of our technology platform. We also plan to leverage relationships, including with academic and industry partners, to help expedite bringing potential new applications of our technology to market.
Our Strengths
We believe our competitive advantages include:
•Our multi-cancer early detection test, Galleri: We believe detection of multiple types of cancers at earlier stages will lead to improved clinical outcomes. In a clinical study, Galleri detected over 50 types of cancers, over 45 of which lack recommended screenings, with a false positive rate of less than 1%. When a cancer was detected, Galleri localized the cancer signal with high accuracy, all from a single blood draw. Galleri is intended to complement existing screening methods. We are preparing to launch Galleri commercially in 2021.
•Our diagnostic aid for cancer test (DAC): Using the same proprietary platform used to develop Galleri, we have developed a test that could help accelerate diagnostic resolution for symptomatic patients with a suspicion of cancer. Through a single blood test, DAC could provide physicians with a powerful decision-making tool to inform diagnostic workup plans quickly and cost effectively. We intend to launch DAC in the second half of 2021, and our commercial focus for DAC will be targeted to physician specialists and suspicion of cancer clinics.
•One of the cancer field’s largest genomic databases linked with population-scale clinical evidence: Our research to date has enabled us to build one of the world’s largest databases of genomic and clinical data in the cancer field. Each sample that we sequence contributes additional genomic, phenotypic, and clinical data that could help inform our platform. Together with our partners at leading academic cancer institutions and large community networks, we have taken a rigorous approach to the design of our clinical programs and collection of population-scale clinical data, which to date includes approximately 115,000 enrolled participants in four studies.
•Our platform, derived from a rigorous scientific approach to cancer biology and machine learning: We have taken a first principles approach to developing a deep and comprehensive understanding of cancer biology by building an atlas to characterize the landscape of cell-free nucleic acids (cfNA) in a generalizable population, seeking diverse individuals both with and without cancer in our studies. Data from initial discovery studies have enabled us to compare the performance of these signals and to select and refine our proprietary methylation technology that targets the most informative methylation sites for use in Galleri and DAC. Our state-of-the-art machine learning technology analyzes subtle and complex signals in
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data generated through our clinical studies, significantly reducing technical and biological noise. We are leveraging our platform to broaden our applications beyond early cancer detection, including developing tests for post-cancer diagnostic applications, and over time, potentially in areas beyond cancer.
•Our multidisciplinary team: Our team is constructed to tackle the difficult challenge of improving outcomes for cancer patients. We are led by a multidisciplinary team with extensive experience across biotechnology, life science, public health, genomics, computer science, data science, biostatistics, clinical development, medical and regulatory affairs, quality assurance and laboratory operations.
•Our intellectual property portfolio: We own or license exclusive, worldwide commercial rights to the products we are developing. We have exclusive licenses to more than 230 granted patents globally and own more than 170 pending patent applications, covering technologies that form the basis for our methylation technology as well those related to other NGS approaches to help detect cancer.
Our Strategy
Key elements of our strategy include:
•Establishing commercial leadership in large markets with significant unmet medical needs. We believe that we have an unprecedented opportunity to transform cancer care and establish market leading positions for both Galleri and DAC. We believe the potential clinical and economic utility of Galleri will support commercial adoption. DAC could also serve a significant unmet medical need by allowing physicians to accelerate the diagnostic resolution for symptomatic patients. In the near term, we plan to focus on facilitating adoption of Galleri and DAC in the United States by increasing physician awareness of the potential value of our products.
•Expanding access to our tests by pursuing reimbursement and coverage from payors. To help support reimbursement and coverage for our tests, we plan to seek U.S. Food and Drug Administration (FDA) clearance or approval for Galleri following its planned initial launch as an LDT. We believe that enabling early detection of multiple cancer types early could drive significant value for healthcare stakeholders as the costs of cancer-related care for individuals diagnosed at later stages can be significantly higher than for those diagnosed at earlier stages.
•Continuing to enhance our core technology platform. We seek to continually enhance the performance and features of our tests, including seeking ways to improve sensitivity and reduce sequencing costs. We also plan to grow our database of genomic and clinical data, which could lead to performance improvements for Galleri and DAC. We also continue to take a comprehensive, rigorous, and unbiased multi-omics approach to discover and evaluate additional signals that may enhance our test performance, including from cfRNA and urine cfDNA.
•Broadening the applications of our technology platform. We are developing applications for our technology within cancer management, including for monitoring and diagnostic purposes, which currently include our potential products, such as minimal residual disease and other post-diagnostic tests. We also seek to enter into agreements with academic and industry partners to help expedite additional discovery efforts. Over time, we believe our platform capabilities may allow us to move into testing applications in additional disease areas beyond cancer.
•Maintaining a patient-first, entrepreneurial corporate culture that champions diversity. Our goal is to leverage our platform to help patients. To accomplish this goal, we aim to foster an entrepreneurial and inclusive culture for our diverse employee pool with expertise in biology, chemistry, bioinformatics software, drug discovery, development, and commercialization.
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Risk Factors
Investing in our common stock involves risk. You should carefully consider all the information in this prospectus prior to investing in our common stock. These risks are discussed more fully in the section titled “Risk Factors” immediately following this prospectus summary and elsewhere in this prospectus. These risks and uncertainties include, but are not limited to, the following:
•We are a pre-commercial stage healthcare company operating in a rapidly evolving field and have a limited operating history, which makes it difficult to evaluate our current business and predict our future performance.
•We have incurred significant net losses in each period since our inception and anticipate that we will continue to incur net losses for the foreseeable future.
•Our products may not perform as expected, and the results of our clinical studies, some of which were conducted on an earlier version of Galleri than the version we plan to initially launch, may not support the launch or use of our products and may not comply with the requirements, or be replicated in later studies, required for any necessary or desirable regulatory clearances or approvals. This could materially and adversely affect our business, financial condition, results of operations, and growth prospects.
•Clinical trials are necessary to validate our investigational products to launch them as LDTs and to support future product submissions to FDA. The clinical trial process is lengthy and expensive with uncertain outcomes, and often requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. We have encountered delays and may encounter substantial delays in our clinical studies, including due to the novel strain of coronavirus (COVID-19), and may therefore be unable to complete our clinical studies on the timelines we expect, if at all, which could materially and adversely impact our ability to launch our products and seek regulatory clearance or approval.
•Even if we commercially launch our products, they may fail to achieve the degree of market acceptance necessary for commercial success.
•We have never generated revenue from product sales, do not expect any near-term revenue to offset our ongoing operating expenses, and may never be profitable.
•We may be unable to develop and commercialize new products.
•We rely on Illumina, Inc. as a sole supplier for our next-generation sequencers and associated reagents, Streck as a sole supplier of our blood collection tubes, and Twist Bioscience as a sole supplier of our deoxyribonucleic acid (DNA) panels. Additionally, we rely on a limited number of suppliers for some of our laboratory instruments and reagents, and we may not be able to find replacements or immediately transition to alternative suppliers if necessary.
•We plan to initially launch our products as LDTs, and if FDA were to end or modify its current policy of enforcement discretion on LDTs, or if Congress enacts legislation that changes the current requirements for LDTs, we may lose the ability to commercialize Galleri and DAC without FDA premarket clearance or approval, which could require us to incur substantial costs and delays.
•The regulatory clearance or approval processes of FDA and comparable foreign regulatory authorities are lengthy, time-consuming, and unpredictable. If we are ultimately unable to obtain any necessary or desirable regulatory approvals or clearances, or if such approvals or clearances are significantly delayed, our business will be substantially harmed.
•If we are unable to obtain and maintain intellectual property protection for our technology, or if the scope of the intellectual property protection we obtain is not sufficiently broad, our competitors could develop and commercialize technology and tests similar or identical to ours, and our ability to successfully commercialize our products may be impaired.
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•Our success depends on our ability to develop and commercialize our technology without infringing, misappropriating, or otherwise violating the intellectual property of third parties. Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, and if they prevail, could block sales of our products and force us to make large damages and/or royalty payments, which could have a material adverse effect on the success of our business.
•Our business is subject to risks arising from epidemic diseases, such as the recent global outbreak of COVID-19.
Corporate Information
We were incorporated in the State of Delaware on September 11, 2015. Our principal executive offices are located at 1525 O’Brien Drive, Menlo Park, California 94025, and our telephone number is (650) 542-0372. Our website is https://grail.com/. Neither our website nor the information contained in, or accessible from, our website is incorporated into this prospectus or the registration statement of which it forms a part.
Implications of Being an Emerging Growth Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). For as long as we remain an emerging growth company, we are permitted and currently intend to rely on the following provisions of the JOBS Act that contain exceptions from disclosure and other requirements that otherwise are applicable to companies that conduct initial public offerings and file periodic reports with the Securities and Exchange Commission (SEC). These JOBS Act provisions:
•provide an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002 (SOX);
•permit us to present only two years of audited financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;
•provide an exemption from compliance with the requirement of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on the financial statements;
•permit us to include reduced disclosure regarding executive compensation in this prospectus and our SEC filings as a public company; and
•provide an exemption from the requirement to hold a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute arrangements not previously approved.
We will remain an emerging growth company until:
•the first to occur of the last day of the fiscal year (1) that follows the fifth anniversary of the completion of this offering, (2) in which we have total annual gross revenue of at least $1.07 billion, or (3) in which we are deemed to be a “large accelerated filer,” as defined in the Securities Exchange Act of 1934 (Exchange Act); or
•if it occurs before any of the foregoing dates, the date on which we have issued more than $1 billion in non-convertible debt over a three-year period.
We could become a “large accelerated filer” as early as December 31, 2021 if our aggregate worldwide voting and non-voting equity market capitalization held by non-affiliates exceeds $700 million on the relevant measurement date.
We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the
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information that we provide to our stockholders may be different than what you might receive from other public reporting companies in which you hold equity interests.
We have irrevocably elected not to avail ourselves of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. As a result, we will be subject to new or revised accounting standards at the same time as other public companies that are not emerging growth companies.
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THE OFFERING
Common stock offered          shares
Common stock to be outstanding after this offering          shares (or              shares if the underwriters exercise their over-allotment option in full)
Over-allotment option          shares
Use of proceeds
We estimate that the net proceeds to us from this
offering will be approximately $     million, or approximately $     million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the initial public offering price per share would increase or decrease our net proceeds, after deducting estimated underwriting discounts and commissions, by $        million (assuming no exercise of the underwriters’ over-allotment option). Each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease our net proceeds by $       million, assuming an initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
We currently expect to use the net proceeds from this offering, together with our existing cash, cash equivalents, and marketable securities, for current and future product development, including expansion of our laboratory operations, to fund ongoing and new clinical trials, for preparation for commercial launch and expansion of commercial operations, and for working capital and general corporate purposes. See “Use of Proceeds.”
Risk factorsSee “Risk Factors” beginning on page 16 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding whether to invest in our common stock.
Directed share program
At our request, the underwriters have reserved            % of the common stock offered by this prospectus, at the initial public offering price, to certain of our directors, officers, employees, business associates and related persons through a directed share program. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as other shares offered by this prospectus. Morgan Stanley & Co. LLC, an underwriter in this offering, will administer our directed share program. See “Underwriting” for additional information.
Proposed Nasdaq Global Select Market stock symbol“GRAL”
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Unless we specifically state otherwise or the context otherwise requires, the number of shares of our common stock to be outstanding after this offering is based on 671,186,864 shares of common stock outstanding as of June 30, 2020 and excludes:
▪ 98,033,707 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2020, at a weighted-average exercise price of $1.62 per share;
▪ 30,343,670 shares of common stock issuable upon the vesting and settlement of restricted stock units (RSUs) outstanding as of June 30, 2020;
▪ 9,233,000 shares of common stock issuable upon exercise of stock options granted after June 30, 2020, at a weighted-average exercise price of $2.09 per share;
▪         shares of our common stock to be reserved and available for future issuance under our current 2016 Equity Incentive Plan (the 2016 Plan) and equity incentive plans that we expect to implement in connection with the Offering, as more fully described in the section titled “Executive Compensation—Executive Compensation Arrangements—Equity Incentive Plans,” including:
• 14,975,649 shares of our common stock reserved for future issuance under our 2016 Plan as of June 30, 2020;
•any shares of our common stock issuable in connection with the vesting or exercise (as applicable) of outstanding awards under our 2016 Plan;
•                       shares of our common stock that we expect to reserve for future issuance under our 2020 Equity Incentive Plan (the 2020 Plan), which we expect will become effective in connection with this offering;
•any shares authorized as automatic annual increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 Plan;
•automatic increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 Plan;
•shares of our common stock that we expect to reserve for future issuance under our 2020 Employee Stock Purchase Plan (the 2020 ESPP), which we expect will become effective in connection with this offering; and
•any shares authorized as automatic annual increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 ESPP.
Unless we specifically state otherwise or the context otherwise requires, this prospectus reflects and assumes the following:
▪no exercise of outstanding stock options subsequent to June 30, 2020;
▪no vesting and settlement of outstanding RSUs subsequent to June 30, 2020;
▪outstanding shares include 605,555 shares of Class A common stock issued upon early exercise of stock options and subject to repurchase as of June 30, 2020;
▪no exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock in this offering;
▪a one-for-           reverse stock stock split of our common stock to be effected prior to the closing of this offering;
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▪the filing and effectiveness of our amended and restated certificate of incorporation, to be in effect at the closing of this offering; and
▪the conversion of all Class B common stock into 26,179,368 shares of Class A common stock, the reclassification of our Class A common stock and Class B common stock into a single class of common stock, and the conversion of all our redeemable convertible preferred stock into 534,145,027 shares of common stock prior to the closing of the offering as described under “Description of Capital Stock—Reclassification and Conversion of Class A Common Stock, Class B Common Stock, and Redeemable Convertible Preferred Stock.”
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data for the periods and as of the dates indicated. We have derived the consolidated statements of operations data for the years ended December 31, 2018 and 2019 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statements of operations data for the six months ended June 30, 2019 and 2020 and the consolidated balance sheet data as of June 30, 2020 from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in our opinion, all adjustments of a normal and recurring nature that are necessary for the fair statement of the financial information set forth in those statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of results that may be expected in the future. You should read the following summary consolidated financial data together with our audited consolidated financial statements and our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this prospectus and the information in the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended
December 31,		Six Months Ended
June 30,
2018201920192020
(in thousands, except share and per share data)
Consolidated Statements of Operations Data:
Operating expenses:
Research and development(1)
$190,205 $158,886 $83,230 $83,009 
Research and development—related parties(1)
32,955 8,202 4,493 4,190 
Marketing(1)
6,107 7,679 4,080 4,690 
General and administrative(1)
58,229 80,896 31,612 47,304 
Total operating expenses287,496 255,663 123,415 139,193 
Loss from operations287,496 255,663 123,415 139,193 
Interest income, net(12,550)(12,430)(6,995)(4,128)
Other expense, net287 1,817 714 1,335 
Loss before provision for (benefit from) income taxes
275,233 245,050 117,134 136,400 
Provision for (Benefit from) income taxes485 (195)66 16 
Net loss$275,718 $244,855 $117,200 $136,416 
Net loss attributable to Class A and Class B common stockholders
Basic and diluted$275,718 $244,855 $117,200 $136,416 
Net loss per share attributable to Class A and Class B common stockholders(2)
Basic and diluted$(2.42)$(1.99)$(0.97)$(1.03)
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders(2)
Basic and diluted114,138,912 123,188,351 120,748,150 132,864,532 
Pro forma net loss per share attributable to common stockholders (unaudited)(2)
Basic and diluted$(0.42)$(0.21)
Weighted-average shares of common stock used in computing pro forma net loss per share (unaudited)(2)
Basic and diluted587,035,445 643,637,763 
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___________________
(1)Includes stock-based compensation expense as follows:
Year Ended
December 31,		Six Months Ended
June 30,
2018201920192020
(in thousands)
Research and development$937 $3,913 $1,595 $2,957 
Research and development—related parties778 135 67 30 
Marketing123 202 13 1,230 
General and administrative9,203 24,141 6,004 19,730 
Total stock-based compensation expense$11,041 $28,391 $7,679 $23,947 
(2)See Note 13 to our audited consolidated financial statements and Note 12 to our unaudited condensed consolidated financial statements for further details on the calculation of net loss per share attributable to Class A and Class B common stockholders, basic and diluted, and the weighted-average shares used to compute net loss per share attributable to Class A and Class B common stockholders, basic and diluted, and pro forma information.
As of June 30, 2020
Actual
Pro Forma(1)
Pro Forma As Adjusted(2)
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, and marketable securities$685,571 $685,571 
Working capital(3)
633,653 633,653 
Total assets756,427 756,427 
Total liabilities82,028 82,028 
Redeemable convertible preferred stock1,994,921 — 
Accumulated deficit(1,442,047)(1,442,047)
Total stockholders’ (deficit) equity(1,320,522)674,399 
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(1)The unaudited pro forma information in the table above has been prepared to reflect the following prior to or upon the closing of this offering: (i) the filing and effectiveness of our amended and restated certificate of incorporation and (ii) the conversion of all outstanding redeemable convertible preferred stock into common stock.
(2)The pro forma as adjusted consolidated balance sheet data in the table above reflects the pro forma adjustments described in footnote (1) above plus the sale and issuance by us of          shares of our common stock in this offering, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the initial public offering price of $           per share would increase or decrease the pro forma as adjusted amount of each of cash, cash equivalents, and marketable securities, working capital, total assets, and total stockholders’ equity by approximately $           , 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 estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease each of cash, cash equivalents, and marketable securities, working capital, total assets, and stockholders’ equity by approximately $           , assuming the initial public offering price of $         per share remains the same, and after deducting estimated 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 initial public offering price and other terms of this offering determined at pricing.
(3)We define working capital as current assets less current liabilities. See our unaudited condensed consolidated financial statements for further details regarding our current assets and current liabilities.
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RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus, before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our common stock could decline and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business and Industry
We are a pre-commercial stage healthcare company operating in a rapidly evolving field and have a limited operating history, which makes it difficult to evaluate our current business and predict our future performance.
We are a pre-commercial stage healthcare company operating in a rapidly evolving field and, having commenced operations in January 2016, have a limited operating history. We do not currently have a commercial product for sale. We have funded our operations to date primarily with the proceeds from the sale of equity securities and have never generated any revenue. Our short operating history as a company makes any assessment of current business or our future success and viability subject to significant uncertainty. We expect to encounter risks and difficulties, including those frequently experienced by early-stage companies in rapidly evolving fields. If we do not address these risks and difficulties successfully, our business will suffer.
We have incurred significant net losses in each period since our inception and anticipate that we will continue to incur net losses for the foreseeable future.
Since our inception, we have not generated any revenue and have incurred significant net losses. Our net losses were $275.7 million and $244.9 million for the years ended December 31, 2018 and 2019, respectively, and $136.4 million for the six months ended June 30, 2020. Substantially all of our net losses since inception have resulted from our research and development programs, and general and administrative costs associated with our operations, as well as costs incurred in connection with the acquisition of Cirina Limited in 2017. As of June 30, 2020, we had an accumulated deficit of $1.4 billion.
We have invested significant financial resources in research and development activities, including to develop our technology, develop our investigational products, including our multi-cancer test, Galleri, and diagnostic aid for cancer test (DAC), and plan for commercial launch. The amount of our future net losses will depend, in part, on the level of our future expenditures and our ability to generate revenue. Moreover, our net losses may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.
We expect to continue to incur significant expenses and operating losses for the foreseeable future if and as we:
•attract, hire, and retain qualified personnel;
•continue our research and development activities;
•conduct our existing clinical studies and initiate and conduct additional clinical studies to support the development and commercialization of our products;
•expand our laboratory capacity and operating capabilities as we prepare for commercial scale;
•seek regulatory approvals and any other marketing authorizations or clearances that may be necessary or desired for our products;
•establish sales, marketing, and distribution infrastructure to commercialize our products;
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•acquire or in-license additional intellectual property and technologies;
•make milestone, royalty, or other payments due under any license or collaboration agreements;
•obtain, maintain, protect, and enforce our intellectual property portfolio, including intellectual property obtained through license agreements;
•provide additional infrastructure to support our continued research and development operations and any planned commercialization efforts in the future;
•meet the requirements and demands of being a public company; and
•defend against any product liability claims or other lawsuits related to our products.
Our products may not perform as expected, and the results of our clinical studies, some of which for Galleri were conducted on an earlier version than the version we plan to initially launch, may not support the launch or use of our products and may not comply with the requirements, or be replicated in later studies, required for any necessary or desirable regulatory clearances or approvals. This could materially and adversely affect our business, financial condition, results of operations, and growth prospects.
We do not currently have a commercial product. Our success depends on the market’s confidence that we can provide reliable, high-quality products, as well as our ability to complete clinical studies and comply with applicable regulatory requirements that would allow us to commercially launch our products. Assuming successful launch, our products, including Galleri and DAC, may not perform as expected, and the results obtained from our ongoing or future studies may be inconsistent with certain results obtained from our previous studies. If this were to occur, either before or after launch, our business, financial condition, results of operations, and growth prospects would suffer.
Our products require a number of complex and sophisticated biochemical and bioinformatics processes, many of which are highly sensitive to external factors. An operational or technological 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 that fail to produce consistent results. In addition, we regularly evaluate and refine our algorithms and other processes under development. These refinements may inadvertently result in unanticipated issues that may reduce our sensitivity and specificity rates or otherwise adversely affect the performance of our test and its results.
Additionally, many of the studies we have performed on Galleri were performed on an earlier version of the test than the version we plan to launch as a laboratory developed test (LDT). If the version of Galleri we plan to launch as an LDT does not have comparable performance to the earlier version of the test, we may be unable to launch that version, may have to narrow or change the intended use or claims, and/or we may find its commercial profile to be different than expected. Additionally, following the launch of Galleri as an LDT, we currently intend to seek clearance or approval from FDA, and after the launch of DAC as an LDT, we may seek clearance or approval from FDA. FDA and other regulators may require that we generate additional clinical data to support clearance or approval, which could result in delays, increased costs, or other limitations on our ability to receive such clearance or approval. For additional information, see “Risk Factors—Our multi-cancer detection tests are a new approach to cancer screening, which present a number of novel and complex issues for FDA review. Because FDA has never cleared or approved a multi-cancer detection test, it is difficult to predict what information we will need to submit to obtain approval of a PMA from FDA for a proposed intended use, or if we will be able to obtain such approval on a timely basis or at all.”
Further, we plan to iterate and improve, enhancing product performance, offerings, scalability, and/or cost of goods. However, we may not be successful in transitioning our products to a new or enhanced version or iteration. Product development involves a lengthy and complex process and we may be unable to commercialize, validate, or improve performance of any of our products on a timely basis, or at all. Our failure to successfully develop new and/or improved products (including new versions of existing products) on a timely basis could have a material adverse effect on our results of operation and business.
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Finally, generating the clinical data necessary to validate and support the initial launch of our products as LDTs and new versions of products and subsequently obtain regulatory clearance or approval, is time-consuming and carries with it the risk of not yielding the desired results. The performance achieved in published studies may not be replicated in later studies that may be required to obtain or maintain premarket clearance or approval. Limited results from earlier-stage verification studies may not predict results from studies in larger numbers of participants drawn from more diverse populations over a longer period of time. Unfavorable results from ongoing 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 clearances or approvals or commercialization of our products.
Clinical trials are necessary to validate our investigational products to launch them as LDTs and to support future product submissions to FDA. The clinical trial process is lengthy and expensive with uncertain outcomes, and often requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. We have encountered delays and may encounter substantial delays in our clinical studies, including due to COVID-19, and may therefore be unable to complete our clinical studies on the timelines we expect, if at all, which could materially and adversely impact our ability to launch our products and seek regulatory clearance or approval.
Clinical testing is expensive, time-consuming, and subject to uncertainty. Initiating and completing clinical trials necessary to validate and support the launch of Galleri or DAC as LDTs, and to support any future submissions to FDA for regulatory clearance or approval for our products, will be time-consuming and expensive and the outcomes uncertain. Clinical trials must be conducted in accordance with the laws and regulations of FDA and other applicable regulatory authorities’ legal requirements and regulations, and are subject to oversight by these governmental agencies and IRBs at the medical institutions where the clinical trials are conducted.
We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. The timely completion of clinical studies in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of participants who remain in the study until its conclusion. Many of our clinical studies require enrolling a large number of participants without cancer who may not see value in enrollment. Additionally, we may encounter delays as a result of the administrative complexities in managing and recruiting for studies of this scope and size. If we are unable to recruit sufficient participants for our clinical studies, including PATHFINDER and SUMMIT, or maintain sufficient participation of enrolled participants, our product development, commercialization activities and our ability to seek regulatory clearance or approval for our products could be delayed, modified, or prevented.
For example, the launch of Galleri as an LDT will require validation of data from our clinical studies, including certain data from our ongoing PATHFINDER study, which we are conducting under an approved Investigational Device Exemption (IDE) application. We may encounter difficulties enrolling and completing diagnostic workup on a sufficient number of PATHFINDER participants. The ongoing COVID-19 pandemic has delayed anticipated completion of our PATHFINDER study as we had to suspend enrollment of the study during the second quarter of 2020. While certain study sites have resumed enrollment, not all of them have, and we may need to suspend enrollment again in the future at sites that have resumed enrollment. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, a significant reduction in physician office visits and the willingness of individuals, who may be subject to shelter-in-place orders, to participate in clinical studies. Several factors, including the burden on hospitals and medical personnel, have resulted in the cancellation of non-essential medical procedures, which also contributed to a delay of achieving diagnostic resolutions for participants in the study. Further delays in our PATHFINDER study would cause us to delay the launch of Galleri, which would negatively impact our financial condition and results of operations. For additional information, see “Risk Factors—Our business is subject to risks arising from epidemic diseases, such as the recent global outbreak of COVID-19.”
In addition, we intend to launch Galleri as an LDT. Although LDTs are classified as medical devices, FDA has historically exercised enforcement discretion and has not enforced certain FDA requirements with respect to such products, including premarket review, though such practices may not continue in the future. We intend to launch Galleri as an LDT after validating our product, including on a sufficient number of PATHFINDER participants.
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Moreover, there is risk that the clinical validation data from PATHFINDER, along with other available clinical validation data, may be insufficient to support the launch of Galleri as an LDT for its proposed intended use. Further, FDA may determine that the launch of Galleri as an LDT for its proposed intended use is not permitted while the PATHFINDER study continues to be conducted under an approved IDE. A delay in the launch of Galleri, or inability to launch altogether, as well as a narrowing of the proposed intended use of the product, may negatively impact our financial condition and results of operations.
Moreover, additional issues may arise that could result in the delay, suspension, clinical hold, or termination of such clinical studies. Other events that may prevent successful or timely initiation or completion of clinical studies, or the ability to use data from clinical studies in support of launch as an LDT or for regulatory submissions or otherwise, include:
•the inability to generate sufficient data to support the initiation or continuation of clinical studies or to validate Galleri or DAC in our intended use populations or at all;
•the inability to rely on previously-collected data on earlier versions of Galleri and DAC in support of the launch or submission for marketing authorization of the later versions of our products;
•the potential requirement to submit an additional IDE application to FDA, which must become effective prior to commencing certain human clinical trials of medical devices, and which FDA may disapprove;
•the potential that FDA may modify, withdraw or impose a clinical hold on our current IDE approval pursuant to which we are conducting the PATHFINDER study, and notify us that we may not begin or must discontinue other clinical trials;
•delays caused by participants withdrawing from clinical studies or failing to return for follow-up or by institutions failing to submit data, including follow-up data, to us;
•delays or failure in reaching a consensus or agreement, if required, with regulatory agencies on study design or feedback from regulatory agencies necessitating changes to ongoing or planned clinical study design;
•delays or failure in reaching agreement on acceptable terms with prospective contract research organizations (CROs), service providers, and clinical study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical study sites;
•delays or failure in obtaining any required Institutional Review Board (IRB) approval or ethics committee approval for our clinical study sites;
•delays in amending, or the inability to amend, our IRB-approved protocols at clinical study sites when necessary or desired;
•difficulty or delays in collaborating with sites, institutions, and investigators;
•failure by us, investigators, sites, or participants to comply with the applicable study protocol or applicable regulatory requirements and standards for data collection, reporting, records maintenance, or data integrity;
•failure by us or any CROs or other third parties to adhere to clinical study requirements, including the applicable protocol;
•failure to perform in accordance with good clinical practice (GCP) and good laboratory practice (GLP) requirements, and/or other applicable regulations and requirements of FDA or other applicable governmental authorities;
•failure to comply with applicable data privacy and security laws related to clinical trials, including the European Union’s General Data Protection Regulation (GDPR);
•failure of our products to achieve acceptable sensitivity, specificity, or PPV, and safety endpoints;
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•unacceptable safety findings, including findings related to the risk of the false positive tests (which could lead to unnecessary biopsy or anxiety) or false negative tests (which could lead to a delay in diagnosis or disease progression);
•termination or suspension of a study or site by us or the data safety monitoring board, suspension or termination of a study or site by an IRB, ethics committee, or institution, or clinical hold or termination of a study or site by a regulatory authority, including FDA;
•disqualification, termination, or suspension of a clinical investigator;
•adverse inspection results by any applicable regulatory authority, including FDA or MHRA;
•changes in statutory or regulatory requirements or guidance, or clinical guidelines, that require amending existing or designing new clinical protocols, obtaining new IRB or ethics committee approvals, modifying our clinical studies, modifying our consent process or obtaining additional consent from study participants, or altering the pathway to clearance or approval of our products;
•changes in the standard of care on which a clinical development plan was based, which may require new or additional clinical studies;
•the cost of clinical studies of our products being greater than we anticipate;
•destruction or compromise of, or other inability to access or receive, clinical study samples processed, stored, or managed at a third-party site or otherwise in the control of a third party;
•clinical studies of our products producing negative or inconclusive results, which may result in our deciding, or regulators requiring us, to conduct additional clinical studies or abandon product development programs; and
•lack of adequate funding.
We depend on our collaborators and on medical institutions and CROs to conduct our clinical trials in compliance with applicable GCP requirements. To the extent our collaborators or the CROs fail to enroll participants for our clinical trials, fail to conduct the study to GCP requirements or are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays, and/or enforcement actions. In addition, clinical trials that are conducted in countries outside the United States may subject us to further delays and expenses.
Any inability to initiate or complete clinical studies successfully could result in additional costs to us, slow down or prevent our product development, or impair our ability to generate revenue. Delays in initiating or completing our planned clinical studies could also allow our competitors to bring competing products to market before we do or sooner than expected, which could impair our ability to successfully commercialize Galleri, DAC, or other future products and may harm our business, financial condition, and results of operations. In addition, many of the factors that may cause, or lead to, a delay in initiation or completion of clinical studies may also ultimately lead to the delay or the narrowing or denial of any regulatory clearance or approval we may seek with respect to our products. Delays in the initiation or completion of any clinical study of our products in development will increase our costs, slow down or jeopardize our product development and regulatory clearance or approval process, and delay or potentially jeopardize our ability to commence product sales and generate revenue.
Even if we commercially launch our products, they may fail to achieve the degree of market acceptance necessary for commercial success.
The commercial success of our products, including Galleri, DAC, and any future product we may develop, will depend upon the degree of market acceptance by consumers, including self-insured employers, integrated health
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systems, healthcare providers, patients, and, over the longer-term, third-party payors. The degree of market acceptance of our products will depend on a number of factors, including:
•the performance and clinical utility of such products as demonstrated in clinical studies and published in peer-reviewed journals;
•our ability to demonstrate the clinical utility of our products and their potential advantages to the medical community;
•the ability of our products to demonstrate the same performance in real-world intended use populations as in clinical studies;
•the willingness of consumers, including self-insured employers, integrated health systems, healthcare providers, patients and others in the medical community to utilize our products;
•the willingness of commercial third-party payors and government payors to cover and reimburse for our products, the scope and amount of which will affect an individual’s willingness or ability to pay for our products and likely heavily influence healthcare providers’ decisions to recommend our products;
•with respect to Galleri, which we intend to launch for use in a broad asymptomatic population, the concern that the product could lead to over-diagnosis or a high false-positive rate and unnecessary medical procedures and costs;
•the introduction of competing products, including the expansion of the capabilities of existing products;
•the market acceptance of existing competitive products, including tests that are currently reimbursed;
•publicity concerning our products or competing products; and
•the strength of our marketing and distribution support.
The failure of our products, once introduced, to be listed in physician guidelines or of our studies to produce favorable results or to be published in peer-reviewed journals could limit the adoption of our products. In addition, healthcare providers and third-party payors, including Medicare, may rely on physician guidelines issued by industry groups, medical societies, and other key organizations, such as the USPSTF, before utilizing or reimbursing the cost of any diagnostic or screening test. Although we have a number of clinical studies underway designed to demonstrate the clinical validity of Galleri, our product is not yet, and may never be, listed in any such guidelines.
Further, if our products or the technology underlying them do not receive sufficient favorable exposure in peer-reviewed publications, the rate of physician and market acceptance of our products and positive reimbursement coverage decisions for our products could be negatively affected. The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for products, such as Galleri or DAC, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any product that is developed using data from a clinical study.
Failure to achieve broad market acceptance of our products, including Galleri and DAC, would materially harm our business, financial condition, and results of operations.
We have never generated revenue from product sales, do not expect any near-term revenue to offset our ongoing operating expenses, and may never be profitable.
Our ability to generate revenue from product sales and achieve profitability depends on our ability to commercialize our products. While we plan to commercially launch both Galleri and DAC in the United States in 2021 as LDTs, we cannot assure you that we will successfully be able to do so as planned, if at all, and our failure to do so would prevent us from generating revenue. Furthermore, even if we are able to launch these products in a
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timely manner, we may not be able to generate sufficient revenue to offset our costs and achieve profitability. Our ability to generate future revenue from product sales depends heavily on our success in:
•completing clinical development and validation of our products and continuing to improve product performance and expand product features over time;
•seeking, obtaining, and maintaining marketing approvals, clearances, licenses, or exemptions that may be necessary or desired for Galleri, DAC, and any future products that we develop;
•launching and commercializing Galleri and DAC by establishing a sales force, marketing, medical affairs and distribution infrastructure or, alternatively, collaborating with a commercialization partner;
•obtaining market acceptance by consumers, including self-insured employers, integrated health systems, healthcare providers, patients and third-party payors;
•establishing and maintaining supply and manufacturing relationships with third parties that can timely and consistently provide adequate, in both amount and quality, products and services to support clinical development and the market demand for Galleri and DAC;
•achieving adequate coverage and reimbursement recognition from governments, health insurance organizations, and other third-party payors for products that we launch;
•addressing any technological and market developments, including competing products;
•negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter and maintaining such existing or future arrangements;
•maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets, know-how, and trademarks;
•defending against third-party interference or infringement claims, if any; and
•attracting, hiring and retaining qualified personnel.
We anticipate incurring significant costs to commercialize our products. Our expenses could increase beyond expectations if we are required by FDA or other regulatory agencies to delay our launch, narrow or change our intended use or product claims, modify or expand our clinical studies or to perform additional clinical trials or studies, either pre- or post-approval, in addition to those that we currently anticipate. Additionally, it may be difficult for us to offset the costs of the high-single-digit royalties that we will be required to pay under our agreement with Illumina. See “Related-Party Transactions—Illumina Commercial Agreements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” for more information. Even if we are able to generate revenue from the sale of any products, we may not become profitable and may need to obtain additional funding to continue operations.
We may be unable to develop and commercialize new products.
We continue to expand our research and development efforts to use our proprietary platform and our large clinical and genomic datasets to develop enhanced versions of our products and additional products, including in disease areas beyond cancer. The commercialization of any new products will require the completion of certain clinical development activities, regulatory activities and the expenditure of additional cash resources. We cannot assure you that we can successfully complete the clinical development of any such products.
We expect our operating costs to continue to exceed our revenue, if any, for the foreseeable future. We also cannot assure you that we will be able to reduce our expenditures sufficiently, generate sufficient revenue from products that we successfully commercialize or otherwise mitigate the risks associated with our business to raise enough capital to develop and commercialize new products. In addition, once our development efforts for a product are completed, commercialization efforts, including allocation of resources necessary to comply with applicable
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laws and regulations, will require significant expenditures. Any failure to develop and commercialize new products could have a material adverse effect on our ability to implement our strategy and grow our business.
One of the key elements of our strategy is to expand access to our tests by pursuing reimbursement and coverage from third-party payors. If our products do not receive adequate coverage and reimbursement from third-party payors, our ability to expand access to our tests beyond our initial sales channels will be limited and our overall commercial success will be limited.
We anticipate that we will not have broad-based coverage and reimbursement at the initial commercial launch for Galleri. However, a key element to our strategy is to expand access to our tests by pursuing coverage and reimbursement by third-party payors, including government payors. Coverage and reimbursement by third-party payors, including managed care organizations, private health insurers, and government healthcare programs, such as Medicare and Medicaid in the United States and similar programs in other countries, for the types of early detection tests we perform can be limited and uncertain. Healthcare providers may not order our products unless third-party payors cover and provide adequate reimbursement for a substantial portion of the price of our products. If we are not able to obtain adequate coverage and an acceptable level of reimbursement for our products from third-party payors, there could be a greater co-insurance or co-payment obligation for any individual for whom a test is ordered. The individual may be forced to pay the entire cost of a test out-of-pocket, which could dissuade physicians from ordering our products and, if ordered, could result in delay in or decreased likelihood of our collection of payment. We believe our revenue and revenue growth will depend on our success in achieving broad coverage and adequate reimbursement for our products from third-party payors.
Medicare is the single largest U.S. payor and a particularly important payor for many cancer-related laboratory services given the demographics of the Medicare population. Generally, traditional Medicare fee-for-service will not cover screening tests that are performed in the absence of signs, symptoms, complaints, personal history of disease, or injury except when there is a statutory provision that explicitly covers the test. Galleri could be considered a screening test under Medicare and, accordingly, may not be eligible for traditional Medicare fee-for-service coverage and reimbursement unless we pursue substantial additional measures, which would require significant investments, and may ultimately be unsuccessful or may take several years to achieve.
Further, with respect to Galleri and other products we are developing to help detect other disease, the U.S. Medicare Improvements for Patients and Providers Act of 2008 authorizes the Centers for Medicare and Medicaid Services (CMS) to cover additional preventive services that are not expressly covered by the statute if the service is (a) reasonable and necessary for the prevention or early detection of an illness or disability; (b) recommended with a grade of A or B by the USPSTF, an independent, volunteer panel of experts in the field of prevention, evidence-based medicine and primary care, and (c) appropriate for Medicare beneficiaries under Part A or Part B. CMS establishes coverage through a national coverage determination (NCD) process. In its discretion, the USPSTF generally waits for FDA clearance or approval before it considers undertaking review of novel technology. Because multi-cancer early detection is not expressly authorized for coverage by the Medicare statute, a possible pathway for reimbursement is to first obtain FDA clearance or approval, and then seek a grade of A or B from USPSTF, to enable CMS to issue a NCD. If the USPSTF does not provide our products a grade of A or B or CMS declines to initiate an NCD, or the decision regarding an NCD is negative, our product would not be eligible for fee-for-service Medicare coverage in the absence of a new statutory provision providing for coverage. Even if the USPSTF were to recommend Galleri or other products we are developing, the USPSTF review process and the ensuing NCD process by CMS could take several years to complete, and coverage for our products would be delayed while review is ongoing. The Affordable Care Act (ACA) mandates that many private insurance plans cover, among other preventive health services, evidence-based items or services recommended by USPSTF with a grade of A or B, with certain prohibitions on cost-sharing requirements. Accordingly, if USPSTF does not recommend use of Galleri or other products we are developing or requires a substantial amount of time to review such products, our business and results of our operations would be harmed. Coverage and adequate reimbursement under Medicare Advantage are also uncertain as discussed further in “Government Regulation – Coverage and Reimbursement.” DAC is intended to be a diagnostic product, and we believe we could obtain Medicare coverage and reimbursement in the next several years, although there can be no assurances that we will be successful in doing so.
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If eligible for reimbursement, laboratory tests such as ours generally are classified for reimbursement purposes under CMS’s Healthcare Common Procedure Coding System (HCPCS) and the American Medical Association’s (AMA) Current Procedural Terminology (CPT) coding systems. We and payors must use those coding systems to bill and pay for our diagnostic tests, respectively. These HCPCS and CPT codes are associated with the particular product or service that is provided to the individual. Accordingly, without a HCPCS or CPT code applicable to our products, the submission of claims would be a significant challenge. Once CMS creates an HCPCS code or the AMA establishes a CPT code, CMS establishes payment rates and coverage rules under traditional Medicare, and private payors establish rates and coverage rules independently. Under Medicare, payment for laboratory tests is generally made under the Clinical Laboratory Fee Schedule (CLFS) with payment amounts assigned to specific HCPCS and CPT codes. In addition, effective January 1, 2018, a new Medicare payment methodology went into effect for clinical laboratory tests, under which laboratory-reported private payor rates are used to establish Medicare payment rates for tests reimbursed via the Medicare Clinical Laboratory Fee Schedule. The new methodology implements Section 216 of the Protecting Access to Medicare Act of 2014 (PAMA) and requires laboratories that meet certain requirements related to volume and type of Medicare revenues to report to CMS their private payor payment rates for each test they perform, the volume of tests paid at each rate, and the HCPCS code associated with the test. CMS uses the reported information to set the payment rate for each test at the weighted median private payor rate. Most affected tests are revalued every three years, with the exception of the reporting period between January 1, 2020 and March 31, 2020, which must now be reported between January 1, 2021 and March 31, 2021, and certain advanced diagnostic laboratory tests that are offered by a single laboratory and meet certain other criteria are revalued every year. The full impact of the PAMA rate-setting methodology and its applicability to our products remains uncertain at this time.
Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that a product is appropriate, medically necessary, and cost-effective. Each payor will make its own decision as to whether to establish a policy or enter into a contract to cover our products and the amount it will reimburse for such products. Any determination by a payor to cover and the amount it will reimburse for our products would likely be made on an indication-by-indication basis. For example, because with Galleri we intend to cover a broad asymptomatic population and could potentially generate a significant number of false-positive results on an absolute basis, we may face additional scrutiny in obtaining reimbursement from third-party payors given the additional costs of further diagnostic workup. As a result, obtaining approvals from third-party payors to cover our products and establishing adequate coding recognition and reimbursement levels is an unpredictable, challenging, time-consuming, and costly process and we may never be successful. If third-party payors do not provide adequate coverage and reimbursement for our products, our ability to succeed commercially will be limited.
Even if we establish relationships with payors to provide our products at negotiated rates, such agreements would not obligate any healthcare providers to order our products or guarantee that we would receive reimbursement for our products from these or any other payors at adequate levels. Thus, these payor relationships, or any similar relationships, may not result in acceptable levels of coverage and reimbursement for our products, including Galleri and DAC, or meaningful increases in the number of billable tests we sell to healthcare providers. We believe it may take several years to achieve coverage and adequate reimbursement with a majority of third-party payors, including with those payors offering negotiated rates. In addition, we cannot predict whether, under what circumstances, or at what payment levels payors will cover and reimburse for our products. Although we do not expect Galleri to have Medicare or other third-party coverage or reimbursement in the near term, we plan to market our product to large self-insured employers, certain physician directed channels, including self-insured employers, concierge medicine and executive health programs and innovative health systems. If we fail to establish and maintain broad-based coverage and reimbursement for our products, our ability to expand access to our products, generate increased revenue, and grow our test volume and customer base will be limited and our overall commercial success will be limited.
If our competitors’ products do not perform as intended, the market for our products could be impaired.
Many companies are developing competing cancer detection tests and technologies focused on improving cancer care with cancer detection tests and post-diagnostic products. If any tests marketed or being developed by our competitors similar to our products do not perform to expectations or cause harm or injury to patients, it may result in lower confidence in early disease detection and post-diagnosis tests in general, which could potentially adversely
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affect confidence in our products. As a result, the failure of our products or our competitors’ products to perform as expected could significantly impair our operating results and our reputation.
If we fail to obtain additional financing, we may be unable to expand our commercialization efforts with respect to Galleri and DAC and develop additional products.
Our operations have required substantial amounts of cash since inception. To date, we have financed our operations primarily through the sale of equity securities. Our product development and clinical trial activities are expensive, and we expect to continue to spend substantial amounts as we prepare for the launch and commercialization of Galleri and DAC, continue to enhance our core technology platform, broaden the applications of our technology platform and develop new products. In addition, obtaining any necessary or desirable regulatory approvals and clearances for our products will require substantial additional funding.
As of June 30, 2020, we had $685.6 million in cash, cash equivalents, and marketable securities. We believe that our existing cash, cash equivalents, and marketable securities, together with the proceeds of this offering, will be sufficient to fund our projected operations for at least the next 12 months. Our estimate as to how long we expect our existing cash, cash equivalents, and marketable securities to be available to fund our operations is based on assumptions that may prove to be inaccurate, and we could use our available capital resources sooner than we currently expect. In addition, changing circumstances may cause us to increase our spending significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We may need to raise additional funds sooner than we anticipate.
We will require additional capital for the development and commercialization of Galleri and DAC, and development of additional products. Our future capital requirements depend on many additional factors, including:
•the cost of development and commercialization activities for our products, including Galleri and DAC, including marketing, sales and distribution costs;
•the cost related to scaling operations to support demand for our products, including the cost of construction of a new laboratory in Durham, North Carolina;
•the timing of, and the costs involved in, obtaining any required or desired regulatory approvals and clearances for our products;
•the timing, scope, progress, results and costs of developing additional products, and of conducting clinical studies;
•the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending, and enforcing patent and other intellectual property rights and claims, including litigation costs and the outcome of such litigation;
•the timing and amount of sales of our products, if any, and collection of related receivables;
•the extent to which our products are eligible for coverage and reimbursement from third-party payors;
•the emergence of new technologies or any competing tests, products, or services and other adverse market developments; and
•other potential adverse developments.
Additional capital may not be available when we need it, on terms acceptable to us or at all. We have no committed source of additional capital. Furthermore, any additional capital raised through the sale of equity or equity-linked securities will dilute stockholders’ ownership interests in us, may require stockholder approval, and may have an adverse effect on the price of our common stock. Debt financing, if available, may include restrictive covenants that could limit how we conduct our business. If adequate capital is not available to us on a timely basis, we may be required to significantly delay, scale back, or discontinue the commercialization of our products or research and development programs, or be unable to continue or expand our operations or otherwise capitalize on
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our business opportunities, as desired, which could materially affect our business, financial condition, and results of operations and cause the price of our common stock to decline.
If our products result in direct or indirect participant harm or injury, we could be subject to significant reputational and liability risks, and our operating results, reputation, and business could suffer.
Our success will depend on the market’s confidence that our products, including Galleri and DAC, can provide reliable, high-quality results, once such products are launched. We believe that patients, physicians, and regulators are likely to be particularly sensitive to errors in the use of our products or failure of our products to perform as described, and there can be no guarantee that our products will meet their expectations. Galleri is intended to be used to detect a cancer signal in individuals, but its results are not diagnostic. If a cancer signal is detected, the product would be used to localize the origin of the cancer signal; a “cancer signal detected” test result would need to be followed up by appropriate diagnostic methods. Because the product cannot detect all cancer signals, and may not detect signals for all cancer types, a negative test would not rule out the presence of cancer. Additionally, an individual undergoing unnecessary diagnostic tests on the basis of a false-positive result or an erroneous location of cancer signal result could expose us to significant liability and reputational risks. Similarly, an individual who receives a cancer diagnosis shortly following a “no cancer signal detected” test result may create negative publicity about our product, which would discourage adoption. Performance failures could establish a negative perception of our products among physicians, patients, and regulators, jeopardize our ability to successfully commercialize our products, impair our ability to obtain regulatory approvals or secure favorable coverage and reimbursement, or otherwise result in reputational harm. In addition, we may be subject to legal claims arising from any errors in the use, manufacture, design, labeling or performance of our products, including any false-positive or false-negative results.
We rely on Illumina, Inc. as a sole supplier for our next-generation sequencers and associated reagents, Streck as a sole supplier of our blood collection tubes, and Twist Bioscience as a sole supplier of our DNA panels. Additionally, we rely on a limited number of suppliers for some of our laboratory instruments and reagents, and we may not be able to find replacements or immediately transition to alternative suppliers if necessary.
We rely on Illumina, Inc. as the sole supplier of the next-generation sequencers and associated reagents we use to perform our genomic tests and as the sole provider of maintenance and repair services for these sequencers. Any disruption in Illumina’s operations or breach of our supply-related agreements would impact our supply chain and laboratory operations as well as our ability to develop and commercialize our products, including Galleri and DAC. We also rely on Streck, Inc. as the sole supplier of our blood collection tubes and Twist Bioscience Corporation (Twist) as the sole supplier of our DNA panels. Any interruption in supply from these vendors would delay our ability to develop and commercialize our products.
Further, following our proposed launch of Galleri as an LDT, we are planning to submit a PMA to FDA. We may seek FDA premarket clearance or approval for DAC. For products supplied to us by Illumina, we have not negotiated the use of their products in any FDA-approved or cleared products. We are cooperating with Streck to obtain FDA clearance or approval for their blood collection tubes. In some cases, use of these third-party products in any FDA-cleared or approved product we may seek to commercialize will be conditioned on these suppliers having obtained FDA clearance or approval for their products. Before we pursue clearance or approval for our products that incorporate or use materials supplied to us by these suppliers, we will need to negotiate and execute agreements with these parties and in some cases may need to ensure these products have obtained the requisite clearances or approvals. Any failures or delays in negotiating agreements with our suppliers on reasonable terms, or their inability to obtain any required clearances or approvals, may increase our costs or delay or prevent us from obtaining clearance or approval of, and thus commercializing, Galleri or DAC. Moreover, products supplied to us by Streck for use in our products that we intend to launch as LDTs are currently only available to us as research use only (RUO) devices, which means that Streck intends for the products not to be used for clinical diagnostic use and that the products must be labeled “For Research Use Only. Not for use in diagnostic procedures.” If FDA were to take enforcement action against us or our suppliers for our use of RUO products in connection with our products that we intend to use for diagnostic purposes, including our launch of LDTs, such action could require us to seek alternative suppliers and thus materially and adversely affect our ability to provide timely testing results to our customers and could significantly increase our costs of conducting business. Products for FDA approved or cleared in vitro
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diagnostic use generally have significantly higher costs than LDT uses, which, in turn, are more costly than products intended for RUO.
Our current suppliers, including Illumina, Streck or Twist, may also discontinue or substantially change the specification of products that we utilize in our products. We believe there are only a few other manufacturers that are currently capable of supplying and servicing the other equipment and materials necessary for our laboratory operations, including certain instruments, components, consumables, and reagents. Transitioning to a new supplier for this equipment or these materials would be time-consuming and expensive, could result in interruptions in or otherwise affect the performance specifications of our laboratory operations and sample processing or could require that we revalidate our products and, if we receive FDA clearance or approval for our products, could require a new submission to FDA and other regulatory bodies to approve or clear such changes. In addition, we purchase certain products on a purchase order basis and cannot guarantee a consistent source of supply. The use of equipment or materials provided by a replacement supplier could require us to alter our laboratory operations and sample collection and processing and related procedures. In the case of attempting to obtain an alternative supplier for Illumina, Streck, or Twist, replacement instruments and associated reagents, tubes, and panels that meet our quality control and performance requirements may not be available at all, or may not be available on reasonable terms or in a timely manner. If we encounter delays or difficulties in securing, reconfiguring or revalidating the equipment, reagents and other materials that we require for our laboratory operations and sample collection and processing, we would likely face significant delays in commercializing our products and our business, financial condition, results of operations, and growth prospects would be adversely affected.
If our facilities or those of our third-party collaborators become inoperable, our ability to provide our products will be significantly impaired and our business will be harmed.
We currently perform all research and development, and anticipate that in the near term we will conduct commercial testing work, for our products, including Galleri and DAC when launched, in our laboratory located in Menlo Park, California. The facility may be harmed, rendered inoperable by physical damage or otherwise become partially or completely unusable due to fire, floods, earthquakes, power loss, telecommunications failures, break-ins, accidents, pandemics and similar events, which may render it difficult or impossible for us to provide our products for some period of time. Our laboratory and the equipment we use to perform our research and development or commercialization work could be unavailable or costly and time-consuming to repair or replace. It would be difficult, time-consuming, and expensive to rebuild our facility, particularly in light of the licensure, permits, and accreditation requirements for a clinical laboratory like ours. Although we carry insurance for damage to our properties and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.
In June 2020, we entered into an agreement to lease space in Durham, North Carolina, and are in the process of constructing a new laboratory facility to help us increase product development and operations capacity as we anticipate commercial launch of Galleri and DAC in 2021. Construction requires significant resources and we may encounter difficulties and delays in construction as well as obtaining necessary validation, permits, licenses, certifications (including Clinical Laboratory Improvement Amendments of 1988 (CLIA) and College of American Pathologists (CAP) accreditation) for this forthcoming facility. For example, as circumstances around the COVID-19 pandemic are evolving, government-imposed quarantines and restrictions may also require us to temporarily halt construction or validation activities in North Carolina. If we are unable to complete construction in a timely and satisfactory manner and obtain necessary permits, licenses, certificates, and accreditations within our currently anticipated timelines, we may be unable to meet demand for our products at our Menlo Park facility alone, on a timely basis or at all, which would negatively impact our reputation and commercial plans. We may be unable to regain those customers or repair our reputation in the future, which would negatively impact our business and result of operations.
We also rely on our third-party collaborators, consultants, contractors, vendors, suppliers, and service providers. The facilities of these partners could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, tornadoes, hurricanes, fires, extreme weather conditions, medical epidemics, pandemics and other natural or man-made disasters or business interruptions. In addition, they may be affected by government shutdowns, changes to applicable laws, regulations, and policies, or withdrawn funding. The occurrence of any of
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these business disruptions could seriously harm their ability to complete their contracted services to us, which may adversely impact our operations and financial condition.
Failure of, or defects in, our machine learning and cloud-based computing infrastructure, or increased regulation in the machine learning space, could impair our ability to process our data, develop products, or provide test results, and harm our business and results of operations.
The design, development, maintenance, and operation of our technology over time is expensive and complex, and may involve unforeseen difficulties including material performance problems, undetected defects, or errors. Overcoming technical obstacles and correcting defects or errors could prove to be impossible or impracticable, and the costs incurred may be substantial and adversely affect our results of operations. Additionally, regulation in the machine learning space is constantly evolving and may make it difficult for us to continue using our machine learning approach. If our technology does not function reliably, fails to meet expectations in terms of performance, or cannot be fully utilized due to increasing regulation, we may be unable to provide or our customers may stop using our products.
We currently host all of our data on, and conduct our data analysis through, Amazon Web Services (AWS) cloud-based hosting facilities. Any technical problems or outages that may arise in connection with AWS’s data center hosting facilities could result in loss of our data or delayed or ineffective data processing. A variety of factors, including infrastructure changes, human or software errors, viruses, malware, security attacks, fraud, spikes in customer usage, or denial of service issues could cause interruptions in our service. Such service interruptions may reduce or inhibit our ability to provide our products, delay our clinical studies, and damage our relationships with our customers. We could also be exposed to potential lawsuits, liability claims or regulatory actions, for example if AWS experienced a data privacy breach. If we were required to transfer our data to an alternative hosting provider, the transfer and acclimation to the new provider could result in significant business delays and require additional resources.
If we are unable to scale our operations successfully to support demand for our products, our business could suffer.
As and to the extent test volumes grow, we will need to continue to ramp up laboratory capacity, including moving the processing of Galleri to our new Durham, North Carolina facility over time, as our Menlo Park laboratory may not support the capacity for the anticipated development and commercialization testing in the future. In addition, we will need to implement new infrastructure, data processing capabilities, customer service, billing and systems processes, and expand our internal quality assurance program and technology to support testing on a larger scale. We will also need additional equipment, and certified and licensed laboratory personnel to process higher volumes of tests. We cannot assure you that we will complete construction of our North Carolina facility and obtain necessary certifications, permits, licenses, and accreditations in a timely manner or at all; therefore, we may be unable to move the processing of Galleri to this new laboratory, and we may be unable to complete required development and commercial test processing activities. Because we intend to launch Galleri and DAC initially as LDTs under FDA’s current policy of enforcement discretion, we will need to ensure that any commercialization of the products at the North Carolina facility comply with the requirements applicable to LDTs. According to FDA, an LDT is defined as an in vitro diagnostic test intended for clinical use and designed, manufactured and used within a single laboratory. Failure to comply with FDA requirements regarding the use of a single laboratory could result in FDA determining that its policy of enforcement discretion does not apply and that such products must comply with certain FDA requirements for medical devices, including premarket review. If FDA were to take this position, we and our products could be subject to enforcement action. Further, we may face difficulties increasing the scale of our operations, including implementing changes in infrastructure or programs or acquiring additional equipment or personnel. As we refine our products and develop additional products, we may need to bring new equipment on-line, implement new systems, technology, controls and procedures, and hire personnel with different qualifications, licenses, or certifications.
The value of Galleri and DAC will depend, in part, on our ability to perform tests and return results to providers on a timely basis and at an appropriate quality standard, and on our reputation for such timeliness and quality. Failure to implement necessary procedures, to transition to new equipment or processes, or to hire the appropriate,
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qualified personnel could result in higher costs of processing, longer turnaround times 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, that we will be able to maintain the quality of our test results as we scale our commercial operations, or that we will be successful in responding to the growing complexity of our laboratory operations, including the related data analysis requirements.
In addition, our growth may place a significant strain on our management, operating and financial systems, research and development, 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 and results of operations will suffer if we fail to compete effectively.
The testing and diagnostic products industry is intensely competitive. We have competitors both in the United States and abroad, including AnchorDx, ArcherDx, Inc., Burning Rock Biotech Limited, Exact Sciences Corporation, Freenome, Inc., Guardant Health, Inc., Laboratory for Advanced Medicine, PapGene, Inc., Singlera Genomics, Inc. and Thrive Earlier Detection Corp. that have stated that they are developing tests designed to detect cancer, including some that will use cfNA analyses like ours. Our competitors have or may have substantially greater financial, technical, and other resources, such as larger research and development staff and well-established marketing and sales forces, or may operate in jurisdictions where lower standards of evidence are required to bring products to market. Our competitors may succeed in developing, acquiring, or licensing, on an exclusive basis or otherwise, tests or services that are more effective or less costly than our products. In addition, established medical technology, biotechnology, or pharmaceutical companies may invest heavily to accelerate discovery and development of tests that could make our products less competitive than we anticipate.
Our ability to compete successfully will depend largely on our ability to:
•successfully commercialize our products;
•demonstrate compelling advantages in the performance and convenience of our products, including on a cost competitive basis;
•achieve market acceptance of our products by healthcare providers and patients;
•achieve adequate coverage and reimbursement by third-party payors for our products;
•differentiate our product from the other tests and products of current and potential competitors;
•attract qualified scientific, data science, clinical development, product development, and commercial personnel;
•obtain, maintain, defend, and enforce patent and other proprietary protection as necessary for our products;
•obtain and maintain any necessary or desirable clearance or approval from regulators in the United States and other jurisdictions;
•successfully collaborate with institutions in the discovery, development, and commercialization of our products; and
•successfully expand our operations and implement a successful sales and marketing strategy to support commercialization.
We may not be able to compete effectively if we are unable to accomplish one or more of these or similar objectives.
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Our business is subject to risks arising from epidemic diseases, such as the recent global outbreak of COVID-19.
The recent outbreak of COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19 or other public health epidemic, poses the risk that our company, our personnel, courier delivery services, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. A recession or market correction resulting from the spread of COVID-19 could impact funding for healthcare globally, which may negatively impact our business. While it is not possible at this time to estimate the impact that COVID-19 could have on our business, the COVID-19 pandemic and mitigation measures have had and may continue to have an adverse impact on global economic conditions, which could have an adverse effect on our business, results of operations, cash flows, and financial condition, including impairing the ability to raise capital when needed.
The COVID-19 pandemic has delayed anticipated completion of our PATHFINDER and SUMMIT studies, as we had to suspend enrollment of the studies during the second quarter of 2020. While certain study sites have resumed enrollment, not all of them have, and we may need to suspend enrollment again in the future at sites that have resumed enrollment. There is a risk that changing circumstances relating to the COVID-19 pandemic may not allow our healthcare clinical trial investigators, their healthcare facilities or other necessary parties to continue to participate in our clinical studies through completion or may delay the initiation of planned clinical studies. Additionally, if our trial participants are unable to travel to our clinical study sites as a result of quarantines or other restrictions resulting from the COVID-19 pandemic, we may experience higher drop-out rates or delays in our clinical studies. Government-imposed quarantines and restrictions may also require us to temporarily terminate our clinical sites. Furthermore, if we determine that our trial participants may suffer from exposure to COVID-19 as a result of their participation in our clinical studies, we may voluntarily terminate certain clinical sites as a safety measure until we reasonably believe that the likelihood of exposure has subsided. As a result, our expected regulatory submissions and development timelines for our products have been and may be further negatively impacted. We cannot predict the ultimate impact of the COVID-19 pandemic as consequences of such an event are highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials or as a whole; however, the COVID-19 outbreak may materially disrupt or delay our business operations, further divert the attention and efforts of the medical community to coping with COVID-19, reduce the number of patients getting physicals and physicians potentially ordering our products, disrupt the clinical sites on which we depend, and/or have a material adverse effect on our operations.
If we cannot maintain our current collaborations and enter into new collaborations in a timely manner and on acceptable terms, our efforts to develop and commercialize our products could be delayed or adversely affected.
We rely, and expect to continue to rely, on collaborative partners to help us develop our products. For example, we currently collaborate with pharmaceutical companies, research institutions, including The Chinese University of Hong Kong and Hebrew University of Jerusalem among others, to enhance our research efforts. Under our Contract Research Agreement with the Chinese University of Hong Kong we have exclusive rights to certain intellectual property developed by the Chinese University of Hong Kong. After the Contract Research Agreement expires in August 2021, there is potential that the Chinese University of Hong Kong could develop intellectual property applicable to our business that we may be interested in, and if so, we would need to negotiate for rights to such intellectual property. Our reliance on these third parties reduces our control over our product development activities. If any of our collaborators were to breach or terminate its agreement with us or otherwise fail to conduct the contracted activities successfully and in a timely manner, the research, development or commercialization activities of our products could be delayed or terminated. Further, our collaborators may fail to properly protect our intellectual property rights, may infringe the intellectual property rights of third parties, may misappropriate our trade secrets, or may use our proprietary information or others’ in such a way as to expose us to litigation and potential liability. Disagreements or disputes with our collaborators, including disagreements over proprietary rights, funding, or contract interpretation, might cause delays or termination of the research, development or commercialization of our products, might lead to additional responsibilities for us with respect to these products or activities or might result in litigation or arbitration, any of which would divert management attention and resources and be time-consuming and expensive. We may not be able to renew our current agreements with collaborators or
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negotiate additional collaboration agreements on acceptable terms, if at all, and these collaborations may not be successful. Any transition from a current collaborator to a new collaborator could be costly and result in significant product development delays.
From time to time, we expect to engage in discussions with potential development and/or commercial collaborators that may or may not lead to collaborations. However, we cannot guarantee that any discussions will result in development or commercial collaborations. Further, once news of discussions regarding possible collaborations are known in the general public, regardless of whether the news is accurate, failure to announce a collaboration agreement, or the entity’s announcement of a collaboration with an entity other than us, could result in adverse speculation about us, our products or our technology, resulting in harm to our reputation and our business. In addition, establishing collaborations is difficult, time-consuming and may require our significant financial investment. Potential collaborators may elect not to work with us based on their assessment of our financial, regulatory, or intellectual property position. Even if we establish new collaborations, they may not result in the successful development or commercialization of our products or technology.
If we are unable to establish sales and marketing capabilities, we may not be successful in commercializing our products.
We have only limited sales and marketing infrastructures and no experience as a company in the sale, marketing, and distribution of screening or diagnostic tests. In preparation of the commercial launch of Galleri and DAC, we are rapidly hiring additional personnel in our sales and marketing organization.
Factors that may inhibit our efforts to commercialize any of our products include:
•our inability to recruit and retain adequate numbers of effective sales, marketing, reimbursement, customer service, medical affairs, and other support personnel;
•the inability of sales personnel to persuade adequate numbers of customers, including healthcare systems and healthcare providers, to use our products;
•the inability to price our products at a sufficient price point to ensure an adequate and attractive level of profitability;
•our inability to effectively market to, collaborate with, and secure coverage and reimbursement from third-party payors;
•our failure to comply with applicable regulatory requirements governing the sale, marketing, reimbursement, and commercialization of our products; and
•unforeseen costs and expenses associated with creating an independent commercialization organization.
We rely on third parties to conduct portions of our clinical studies. These third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such studies.
We currently rely and expect to rely on third parties, such as CROs and other service providers, medical institutions, and clinical investigators, to conduct some aspects of our clinical studies. Any of these third parties may terminate their engagements with us, be unable to fulfill their contractual obligations or fail to meet applicable regulatory requirements. If we need to enter into alternative arrangements, our product development activities could be delayed.
Our reliance on third parties for clinical study-related activities reduces our control over these activities but does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical studies is conducted in accordance with the general investigational plan, protocol, consent form, IRB approval, and applicable requirements. Moreover, FDA requires compliance with applicable Good Clinical Practice (GCP) requirements for sponsoring clinical studies to assure that data and reported results are credible, reproducible and accurate and that the rights, welfare, and safety of study participants are protected for data used in support of a regulatory submission. We also are required to register applicable clinical studies and post certain results on a
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government-sponsored database within certain timeframes. Failure to do so can result in fines, adverse publicity, and civil and criminal sanctions.
If the third parties we rely on do not successfully carry out their contractual duties, meet expected deadlines, or conduct our clinical studies in accordance with regulatory requirements or IRB- or ethics committee-approved protocols, we will not be able to obtain, or may be delayed in obtaining, any necessary or desirable marketing authorizations for our products and will not be able to, or may be delayed in our efforts to, successfully commercialize our products.
We depend on our information technology and telecommunications systems and those of third parties, any failure or disruption of these systems could harm our business.
We depend on information technology and telecommunications systems, including those provided by third parties and their vendors, for significant elements of our operations, such as our laboratory information management systems, including test validation, specimen tracking, and quality control; personal information collection, storage, maintenance, and transmission; our report production systems; and our billing and reimbursement, research and development, scientific and medical data analysis, and general administrative activities. In addition, our third-party service providers depend upon technology and telecommunications systems provided by outside vendors. In connection with becoming a public company, we expect to expand and strengthen a number of enterprise software systems that affect a broad range of business processes and functions, including, for example, systems handling human resources, financial controls and reporting, customer relationship management, regulatory compliance, security controls, and other infrastructure operations. These expansions may prove more difficult than we expect and could cause disruptions in our operations or additional expense.
Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive events. Despite the precautionary measures we have taken to detect and prevent or solve problems that could affect our information technology and telecommunications systems, failures or significant downtime of these systems or those used by our third-party service providers and their vendors could prevent us from conducting tests, preparing and providing reports to future customers, billing payors, conducting research and development activities, maintaining our financial controls and other reporting functions, and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.
We are highly dependent on our key personnel. If we are not successful in attracting, motivating, and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.
Our ability to compete in the highly competitive biotechnology industry depends upon our ability to attract, motivate, and retain highly qualified personnel. We are highly dependent on our executive management team and our scientific, medical, technological, and engineering personnel, all of whom have been working together as a group for only a limited period of time. The loss of the services provided by any of our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements, could result in delays in commercialization of our products and harm our business. We do not maintain “key person” insurance policies on the lives of these individuals or the lives of any of our other employees.
We are headquartered in Menlo Park, California, a region in which many other healthcare companies, technology companies and academic and research institutions are headquartered. In addition, we are constructing a new laboratory facility in Durham, North Carolina, where there is also demand for skilled personnel. Competition for personnel is intense and the turnover rate can be high, which may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all. We expect that we may need to recruit talent from outside of our region, and doing so may be costly and difficult.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have generally provided stock option grants that vest over time. The value to employees of these equity grants that vest
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over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Although we have employment agreements with certain key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. If we are unable to attract and incentivize highly qualified personnel on acceptable terms, or at all, our business and results of operations may suffer.
We will need to grow the size and capabilities of our organization, and we may experience difficulties in managing this growth.
As of August 31, 2020, we had 436 employees, substantially all of whom were full-time. As our development plans and strategies develop, and as we transition into operating as a public company, we must add a significant number of additional managerial, operational, financial, and other personnel. Future growth will impose significant added responsibilities on members of management, including:
•identifying, recruiting, integrating, retaining, and motivating additional employees;
•managing our internal development efforts effectively, including creating compliant programs and processes, such as a compliant laboratory and manufacturing quality system, and managing the regulatory requirements for our products, while complying with our contractual obligations to contractors and other third parties;
•expanding our operational, financial and management controls, reporting systems, and procedures; and
•managing the increasing complexity associated with a larger organization and expanded operations.
Our future financial performance and our ability to commercialize our products will depend, in part, on our ability to effectively manage any future growth. Our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to manage these growth activities. Our ability to successfully manage our expected growth is uncertain given the fact that we have been in operation as an independent company only since early 2016. Our executive management team’s lack of long-term experience working together may adversely impact their ability to effectively manage our business and growth.
If we are not able to effectively expand our organization by hiring new employees, we may not be able to successfully implement the tasks necessary to commercialize our products, which would have negative impact on our business and result of operations.
Our business is subject to economic, political, regulatory, and other risks associated with international operations.
Our business is subject to risks associated with conducting business internationally. For example, some of our suppliers and parties with whom we have collaborative relationships are located outside the United States, including in the United Kingdom, China, and Hong Kong. Accordingly, our future results could be harmed by a variety of factors, including:
•economic weakness, including inflation, or political instability in particular non-U.S. economies and markets;
•challenges enforcing our contractual and intellectual property rights, especially in those foreign jurisdictions that do not respect and protect intellectual property rights to the same extent as the United States;
•trade protection measures, import or export controls and licensing requirements (including possible restrictions on licensing intellectual property to certain non-U.S. persons) or other restrictive actions by U.S. or non-U.S. governments;
•changes in non-U.S. laws, regulations and customs, tariffs, and trade barriers;
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•exchange rate risk we may face from denominating a portion of our transactions in currencies other than the U.S. dollar;
•changes in a specific country’s or region’s political or economic environment;
•negative consequences from changes in tax laws;
•negative consequences from changes in U.S. national security laws, including those governing non-U.S. investors’ ownership of U.S. biotech and other technology companies and U.S. companies’ ability to enter into joint ventures with non-U.S. entities;
•compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad;
•workforce uncertainty in countries where labor unrest is more common than in the United States;
•difficulties associated with staffing and managing international operations, including differing labor relations;
•potential liability under the Foreign Corrupt Practices Act (FCPA) or comparable foreign laws; and
•business interruptions resulting from geo-political actions, including war and terrorism, pandemics, or natural disasters, including earthquakes, typhoons, floods, and fires.
The continued spread of COVID-19 and the measures taken by the governments of countries affected could disrupt the supply chain of material needed for our products, some of which we source from China and other countries outside the United States, and has delayed and could further delay clinical trial activities, which has delayed and may further delay product launch, all of which could have a material adverse effect on our business, financial condition and results of operations. For additional information, see “Risk Factors—Our business is subject to risks arising from epidemic diseases, such as the recent global outbreak of COVID-19.”
In addition, the current U.S. administration has publicly supported potential trade proposals that may affect U.S. trade relations with other countries. For example, the current U.S. administration announced tariffs on China which resulted in retaliatory tariffs from China on certain products from the United States. While at this time neither the United States nor China has specifically imposed additional tariffs on healthcare-related products, the nature of this dispute is evolving and additional products such as ours could become subject to tariffs, which could adversely affect their marketability and our results of operations. It is unclear at this point how, if at all, such actions or other potential actions would impact our business or operations, but the uncertainty surrounding these matters could create difficulties in our efforts to partner with healthcare providers, suppliers, and insurance carriers. These and other risks associated with our planned international operations may materially and adversely affect our business and growth prospects.
We are also subject to a number of risks related to regulations and legal compliance. For additional information, see “Risk Factors—Risks Related to Regulation and Legal Compliance.”
Our internal computer systems, or those used by our third-party research institution collaborators or other contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security and back-up measures, our internal computer, server, and other information technology systems as well as those of our third-party collaborators, consultants, contractors, suppliers, and service providers, including AWS, may be vulnerable to damage from physical or electronic break-ins, computer viruses, malware, ransomware, denial of service and other cyber-attacks or disruptive incidents that could result in unauthorized access to, use or disclosure of, corruption of, or loss of sensitive, and/ or proprietary data, including personal and health information, and could subject us to significant liabilities and regulatory and enforcement actions, and reputational damage. For example, one of our research partners disclosed to one of its software vendors certain protected health information of participants who were recruited into one of our clinical studies. After conducting a breach analysis, this research partner informed the affected individuals of the incident. Although we believe this was an isolated incident, if we or any of our third-party collaborators were to experience
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any material failure or security breach in the future, it could result in a material disruption of our development programs, reputation, and business operations. For example, the loss of clinical study data from completed or ongoing clinical studies could result in delays in any regulatory clearance or approval efforts and significantly increase our costs to recover or reproduce the data, and subsequently commercialize our products. If we or our third-party collaborators, consultants, contractors, suppliers, or service providers were to suffer an attack or breach, for example, that resulted in the unauthorized access to or use or disclosure of personal or health information, we may have to notify physicians, patients, partners, collaborators, government authorities, and the media, and may be subject to investigations, civil penalties, administrative and enforcement actions, and litigation, any of which could harm our business and reputation. Likewise, we rely on our third-party research institution collaborators and other third parties to conduct clinical studies, and similar events relating to their computer systems could also have a material adverse effect on our business. The COVID-19 pandemic is generally increasing the attack surface available to criminals, as more companies and individuals work online and work remotely, and as such, the risk of a cybersecurity incident potentially occurring, and our investment in risk mitigations against such an incident, is increasing. For example, there has been an increase in phishing and spam emails as well as social engineering attempts from “hackers” hoping to use the recent COVID-19 pandemic to their advantage. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or systems, or inappropriate or unauthorized access to or disclosure or use of confidential, proprietary, or other sensitive, personal, or health information, we could incur liability and suffer reputational harm, and the development and commercialization of our products could be delayed.
Our insurance policies may not be adequate to compensate us for the potential losses arising from such disruptions, failure, or security breach. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and defending a suit, regardless of its merit, could be costly, divert management attention, and harm our reputation.
We rely on third-party services to collect, process, transport, and store our samples in a secure and cost-efficient manner. If these services were disrupted, our business would be harmed.
Our business depends on our ability to reliably sequence blood samples that we collect, which are transported to our facility for analysis. Our samples are initially collected, processed, frozen, and stored at several off-site facilities in the United States and Germany. Any disruption to the operations of these facilities could compromise the integrity of our samples and impede our ability to accurately sequence the data. For example, BioStorage Technologies, Inc. currently holds our STRIVE clinical samples in its long-term storage facility. If any natural or man-made disaster, accident, or break-in were to affect its facility, our STRIVE samples could be lost, destroyed, compromised, or otherwise adversely affected. In addition, we maintain samples from our clinical trials for several years. It is possible that the long-term stability of these samples may not be maintained with the passage of time, which could negatively impact our ability to use such samples to validate our products. Further, interruptions in collection, processing, freezing, or transportation of samples performed by third parties, whether due to labor disruptions, bad weather, natural disaster, terrorist acts, threats, or for other reasons could adversely affect the samples and our ability to process the samples in a timely manner, which could negatively affect our ongoing research studies and harm our business.
If we are sued for product or professional liability, we could face substantial liabilities that exceed our resources.
Our business depends upon our ability to provide reliable and accurate test results that incorporate rapidly evolving understanding of how to interpret minute signals detected by our assays as indications of potential presence of disease. Actual or perceived errors resulting from laboratory or reporting errors, false positive or false negative test results, or the manufacture, design, or labeling of our products, could subject us to product liability or professional liability claims. A product liability or professional liability claim against us could result in substantial damages and be costly and time-consuming to defend. Although we maintain liability insurance, including for errors and omissions, our insurance may not fully protect us from the financial impact of defending against these types of claims or any judgments, fines, or settlement costs arising out of any such claims. Any 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 liability lawsuit could damage our reputation or force us to suspend sales of our
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products. The occurrence of any of these events could have a material adverse effect on our business, results of operations, financial condition, and prospects.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2019, we had federal and state net operating loss (NOL) carryforwards of $202.5 million and $279.4 million, respectively, and federal and state research and development credit carryforwards of $22.2 million and $18.2 million, respectively. Certain of these NOL and research and development credit carryforwards will begin to expire, if not utilized, in various years beginning in 2036. Federal NOLs generated after December 31, 2017 may be carried forward indefinitely subject to the 80% deduction limitation based upon pre-NOL deduction taxable income. Our ability to utilize such carryforwards is subject to certain conditions and may be subject to certain limitations due to prior or future ownership changes, if any, as defined in Section 382 of the U.S. Internal Revenue Code of 1986, as amended. As such, there can be no assurance that we will be able to utilize such carryforwards. We have experienced a history of losses and a lack of future taxable income would adversely affect our ability to utilize these NOL and research and development credit carryforwards. We have established valuation allowances against our NOLs and research and development credits due to the uncertainty surrounding the realization of such assets.
Our quarterly results of operations may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.
We expect our results of operations to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
•our ability to successfully develop, market, and sell our products, including Galleri and DAC;
•the prices at which we are able to sell our products;
•the impact of competitive developments or our response thereto;
•disruptions in our business due to manufacturing, supply, security breaches, outages, or other issues;
•the cost of performing next-generation sequencing (NGS);
•the extent to which our product is deemed eligible or ineligible for coverage and reimbursement from third- party payors;
•changes in coverage and reimbursement or in reimbursement-related laws directly affecting our business;
•regulatory developments affecting our products or competing products;
•timing of expenditures in connection with our clinical studies; and
•non-routine cash and non-cash expenses and write-offs, whether associated with acquisitions, restructuring activities, litigation, investigations, or otherwise.
If our quarterly results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our results of operations may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.
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Acquisitions or other strategic transactions may increase our capital requirements, dilute our stockholders, cause us to incur debt or assume contingent liabilities, and subject us to other risks.
We have in the past engaged in acquisitions, including our acquisition of Cirina Limited, and we may engage in various acquisitions and strategic partnerships in the future, including licensing or acquiring complementary intellectual property rights, technologies, or businesses. Any acquisition or strategic partnership may entail numerous risks, including:
•increased operating expenses and cash requirements;
•the assumption of indebtedness or contingent liabilities;
•the issuance of our equity securities that would result in dilution to our stockholders;
•assimilation of operations, intellectual property, and products of an acquired company;
•difficulties associated with integrating new personnel;
•retention of key employees, the loss of key personnel, and uncertainties in our ability to maintain key business relationships;
•the diversion of our management’s attention from our existing product programs and initiatives in pursuing such an acquisition or strategic partnership;
•risks and uncertainties associated with the other party to such a transaction, including the prospects of that party and their existing products or product candidates and regulatory approvals, and the validity and enforceability of their intellectual property;
•inability to consummate acquisitions on which we spend a significant amount of time and resources;
•possible write-offs or impairment charges relating to acquired businesses; and
•our inability to generate revenue from acquired intellectual property, technology, or tests sufficient to meet our objectives or offset the associated transaction costs.
In addition, as our strategy evolves, we may opt to discontinue, deprioritize, or dispose of assets, technologies, or acquired businesses. For example, in 2019, we made a decision not to commercialize a stand-alone nasopharyngeal cancer test we were developing and sublicensed the related technology to a third party. We may take similar actions with other products in the future.
Risks Related to Regulation and Legal Compliance
We plan to initially launch our products as LDTs, and if FDA were to end or modify its current policy of enforcement discretion on LDTs, or if Congress enacts legislation that changes the current requirements for LDTs, we may lose the ability to commercialize Galleri and DAC without FDA premarket clearance or approval, which could require us to incur substantial costs and delays.
While we currently anticipate that we will eventually seek regulatory clearance or approval from FDA for Galleri and DAC, we intend to initially launch Galleri and DAC in the United States as LDTs. LDTs are in vitro diagnostic tests that are intended for clinical use and are designed, manufactured, and used within a single laboratory. Although LDTs are classified as medical devices and FDA has statutory authority to ensure that medical devices are safe and effective for their intended uses, FDA has historically exercised enforcement discretion and has not enforced certain applicable FDA requirements, including premarket review, with respect to LDTs, though such practices may not continue in the future.
Even under its current enforcement discretion policy, FDA has issued warning letters to and safety communications about in vitro diagnostic device manufacturers for commercializing laboratory tests that were purported to be LDTs but that FDA alleged failed to meet the definition of an LDT or otherwise were not subject to
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FDA’s policy on enforcement discretion because they presented a potential safety risk. Additionally, FDA could modify its current approach to LDTs in a way that could subject our products that we plan to market as LDTs to the enforcement of additional regulatory requirements. In recent years, FDA has stated its intention to modify its enforcement discretion policy with respect to LDTs. Specifically, on July 31, 2014, FDA notified Congress of its intent to modify, in a risk-based manner, its policy of enforcement discretion with respect to LDTs. On October 3, 2014, FDA issued two draft guidance documents entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs),” or the Framework Guidance, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs),” or the Reporting Guidance. Moreover, even if FDA does not modify its policy of enforcement discretion, FDA may disagree that we are marketing our LDTs within the scope of its policy of enforcement discretion and may impose significant regulatory requirements or take enforcement actions. FDA may request that we provide additional analyses and information beyond that which we intend to produce based on the designs of our current and planned clinical studies, or that we modify or narrow our intended use or product claims. In addition, FDA may choose not to exercise enforcement discretion with respect to our launch of our products as LDTs. As a result, it is possible that FDA may disagree with our interpretation of data from clinical studies to support our LDT launches for our proposed intended uses. If we are required to provide additional analyses or additional data or perform additional clinical studies or research, our commercial launch of Galleri or DAC would be delayed or the indicated uses may be significantly narrowed or modified. A delay in the launch of our products, or significantly narrowing their intended uses, could negatively impact our financial condition and results of operations.
In addition, FDA and Congress have, for over the past decade, considered a number of proposals to change FDA’s enforcement discretion policy for LDTs and subject LDTs to additional regulatory requirements. For example, Congress has recently been working on legislation to create an LDT and in vitro diagnostic regulatory framework for all in vitro clinical tests (IVCTs) that would be separate and distinct from the existing medical device regulatory framework. In March 2020, Members of Congress introduced the Verifying Accurate Leading-edge IVCT Development Act of 2020 (the VALID Act). If passed in its current form, the VALID Act would create a new category of medical products separate from medical devices for IVCTs. As proposed, the bill would establish a risk-based approach to imposing requirements related to premarket review, quality systems, and labeling requirements on all IVCTs, including LDTs, but would create exemptions for certain LDTs marketed before the effective date of the bill (though other regulation requirements may apply, for example, registration and notification, adverse event reporting). It is unclear whether the VALID Act or any other legislative proposals (including any proposals to reduce FDA oversight of LDTs) would be passed by Congress or signed into law by the President. Depending on the approach adopted under any potential legislation, certain LDTs (likely those of higher risk) may be required to undergo some form of premarket review, potentially with a transition period for compliance and a grandfathering provision.
Although FDA halted finalization of the guidance in November 2016 to allow for further public discussion on an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution, and FDA issued a discussion paper on possible approaches to LDT regulation in January 2017, if Congress does not take action in connection with the VALID Act or other LDT legislation, FDA could modify its current approach to LDTs in a way that could require that our products that we anticipate marketing as LDTs comply with additional FDA requirements. On August 19, 2020, the U.S. Department of Health and Human Services announced that FDA will not require premarket review of LDTs absent notice-and-comment rulemaking.
If FDA changes its policy of enforcement discretion for LDTs, we may be required to obtain premarket clearance or approval for our products from FDA or do so earlier than anticipated. The process for submitting a premarket notification and receiving FDA clearance usually takes from three to twelve months, depending on the type of submission, but it can take significantly longer and clearance is never guaranteed. The process for submitting and obtaining FDA clearance or approval is costly and uncertain. Moreover, there can be no assurance that any cleared or approved labeling claims will be consistent with the claims we would make about our products when launched as LDTs, or that such claims will be adequate to support continued adoption of and reimbursement for our products. If premarket review is required for some or all of our products, FDA may require that we stop selling our products pending clearance or approval, which would negatively impact our business. Even if our products are
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allowed to remain on the market prior to required clearance or approval, demand or reimbursement for our products may decline if there is uncertainty about our products, if we are required to label our products as investigational by FDA, or if FDA limits the labeling claims we are permitted to make for our products. As a result, we could experience significantly increased development costs and a delay in generating additional revenue from our products, or from other products now in development.
If FDA changes its enforcement discretion policy or imposes significant changes to the regulation of LDTs, either generally or to our LDT products in particular, it could reduce our revenues or increase our costs and adversely affect our business, prospects, results of operations or financial condition.
The regulatory clearance or approval processes of FDA and comparable foreign regulatory authorities are lengthy, time-consuming, and unpredictable. If we are ultimately unable to obtain any necessary or desirable regulatory approvals or clearances, or if such approvals or clearances are significantly delayed, our business will be substantially harmed.
Following our planned initial launch of Galleri as an LDT, we currently anticipate seeking PMA approval from FDA for a version of Galleri. We may seek FDA premarket clearance or approval for a version of DAC after its LDT launch. Accordingly, we would be subject to FDA’s regulatory review processes. The time required and ability to obtain clearance or approval by FDA and comparable foreign regulatory authorities is unpredictable, typically takes several years following the commencement of clinical studies, and depends upon numerous factors, including the type, complexity, and novelty of our products. In addition, policies, laws, regulations, or the type and amount of clinical data necessary to gain clearance or approval may change during the course of a test’s clinical development and may vary among jurisdictions, which may cause delays in the clearance or approval of, or the decision not to approve, an application. Regulatory authorities have substantial discretion in the premarket review process and may refuse to accept any application, decide that our data are insufficient for clearance or approval, require additional clinical or other data, or determine that our manufacturing and quality systems are insufficient or in violation of applicable requirements. Even if we believe our data are sufficient to support regulatory approval, regulatory authorities may disagree that approval is warranted, or may require the generation and submission of additional data or data analyses and significantly delay approval.
Before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, a company must first submit an application for and receive 510(k) clearance pursuant to a premarket notification submitted under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (FDCA), de-novo classification, or PMA approval from FDA, unless an exemption applies. The PMA approval pathway, which we expect to pursue for Galleri following potential launch as an LDT, requires an applicant to demonstrate the safety and effectiveness of the product based, in part, on valid scientific evidence, including, but not limited to, technical, preclinical, and clinical data. The 510(k) pathway requires a FDA finding that the test is substantially equivalent to a legally marketed predicate device. If no legally marketed predicate can be identified to enable use of the 510(k) pathway, the device is automatically classified under the FDCA into class III, which generally requires PMA approval. However, for low- to moderate-risk devices, FDA allows for the possibility of marketing authorization through the “de novo classification” process rather than requiring the device to be subject to PMA approval.
Products that are approved through a PMA application generally need prior FDA approval before modifications can be made that affect safety or effectiveness, and certain modifications to a 510(k)-cleared device may also require FDA premarket review before the modified product can be marketed. See “Business—Government Regulation—U.S. Regulation and Product Approval—United States Food and Drug Administration.” We have not applied for regulatory clearance or approval for any of our products, and it is possible that we will never obtain regulatory clearance or approval.
FDA or other regulators can delay, limit, or deny premarket clearance or approval of a product for many reasons, including but not limited to the following:
•FDA or comparable foreign regulatory authorities may disagree with the design, implementation, or results of, or interpretation of the data from, our clinical studies;
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•FDA or comparable foreign regulatory authorities may determine that our product has not been shown to be safe and effective or has other characteristics that preclude us from obtaining marketing authorization or prevent or limit its commercial use (for example, a narrowed indication for use claim);
•the population studied in the clinical program may not be sufficiently broad, generalizable, or representative of the intended target population of our product to assure effectiveness and safety in the population for which we seek authorization or clearance;
•FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from clinical studies or may fail to accept data from clinical studies (or clinical sites), including if we fail to establish the integrity of our data;
•FDA or comparable foreign regulatory authorities may determine that our clinical studies otherwise fail to comply with applicable regulations;
•serious or unexpected adverse effects or other performance issues are identified with our products;
•FDA or comparable foreign regulatory authorities may determine that our manufacturing or quality system fails to comply with applicable regulations or otherwise fails to meet the standards necessary to support approval; and
•the approval policies or regulations of FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.
We are engaged in ongoing discussions with FDA regarding the data that will be needed to support a successful PMA for a multi-cancer test for our planned indications, including whether we would need to provide additional analyses and information beyond that which we are currently planning to produce based on the designs of our current and planned clinical studies. There can be no assurance that our products for which we may seek clearance or approval will be approved or cleared by FDA or a comparable foreign regulatory authority on a timely basis, if at all, nor can there be assurance that labeling claims will be consistent with our anticipated claims or adequate to support continued adoption of, and reimbursement for, our products. If our products receive clearance or approval but there is uncertainty about our products among providers or payors, or if the approved indication or other labeling claims FDA or a comparable foreign regulatory authority allows us to make are more limited than we expect, reimbursement may be adversely affected and we may not be able to sell our products. Compliance with FDA or comparable foreign regulatory authority regulations will require substantial costs, and subject us to heightened scrutiny by regulators and substantial penalties for failure to comply with such requirements or the inability to market our products. The lengthy and unpredictable approval process, as well as the unpredictability of the results of our clinical studies, may result in our failing to obtain regulatory clearance or approval to market our products, which would significantly harm our business, results of operations, reputation, and prospects.
Our multi-cancer detection tests are a new approach to cancer screening, which present a number of novel and complex issues for FDA review. Because FDA has never cleared or approved a multi-cancer detection test, it is difficult to predict what information we will need to submit to obtain approval of a PMA from FDA for a proposed intended use, or if we will be able to obtain such approval on a timely basis or at all.
Our multi-cancer detection tests represent a new approach to cancer screening (including the use of pattern recognition of genomic signals), and obtaining FDA approval for Galleri presents a number of novel issues. FDA has never granted marketing authorization for a multi-cancer detection test. Additionally, in March 2020, FDA held a public workshop to discuss the clinical, scientific, and regulatory challenges associated with circulating tumor DNA cancer screening tests, and we expect FDA to continue to gather input from a variety of industry, academic, and clinical stakeholders to inform its thinking on how to assess these types of tests. As such, the FDA requirements that will govern any multi-cancer detection test we develop, as well as the breadth and nature of data we must provide FDA, to support the proposed intended use, may be subject to change.
As part of our ongoing discussions with FDA regarding the data that will be needed to support a PMA for a multi-cancer detection test based on a proposed intended use and consistent with discussions during the March 2020
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public workshop, FDA has provided feedback regarding how it plans to assess the safety and effectiveness of Galleri based on potential intended use statements. In particular, in response to certain questions about the STRIVE study statistical analysis plan, FDA has provided feedback regarding the benefit-risk profile for each cancer type as well as comparative performance of our test against and in combination with standard of care screening methods. FDA has indicated that the sufficiency of our clinical data, including comparative performance data, will be a review issue as part of its review of our PMA for the proposed intended use. While we plan to continue discussions with FDA and provide FDA with additional information, the FDA may raise additional questions or request additional information in connection with the submission of a marketing application.
Given the novel nature and complexity of our multi-cancer detection tests, we cannot be certain whether we will receive FDA marketing authorization for Galleri and whether the studies we have conducted, are currently conducting, or plan to conduct will be sufficient to provide the data that FDA requires to support a proposed intended use. For example, we recognize that our STRIVE clinical study alone would not be sufficient for a proposed multi-cancer early detection intended use statement and we plan on providing evidence from additional clinical studies to support a PMA for Galleri. FDA may require us to perform new analyses of our clinical data or perform additional clinical trials in addition to those we are contemplating. We may be required to undertake significant efforts to address FDA’s requests, which could delay or prevent approval, lead to a more limited intended use statement than the broader intended use statement we plan to pursue, and/or lead to significant post-approval limitations or restrictions, if approval is obtained at all.
Our use and disclosure of personal information, including individually identifiable health information, and biologic samples and related data are subject to federal, state and foreign privacy and security regulation. Data privacy rules are evolving and new legislation concerning privacy and data use may limit our ability to use such data and specimens. Our failure to comply with privacy and security requirements or to adequately secure such information could result in significant liability, administrative or governmental penalties, and/or reputational harm and, in turn, substantial harm to our business and results of operations.
We and our partners may be subject to federal, state, and foreign data protection laws and regulations (i.e., laws and regulations that address data privacy and security). We receive, store, process and use personal information as part of our business. In the United States, numerous state and federal laws and regulations govern the collection, dissemination, use, disclosure, privacy, confidentiality, security, availability and integrity of personal information, including health related information. We are currently not a covered entity under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or the regulations that implement both laws (collectively HIPAA), but we expect to be a covered entity in 2021 around the time we commercially launch our LDT when we begin submitting electronic claims. HIPAA establishes a set of national privacy and security standards for the protection of individually identifiable health information, by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, the business associates with whom such covered entities contract for services that involve creating, receiving, maintaining, or transmitting protected health information, and the subcontractors of such business associates. In addition, we may obtain health information from third parties (including research institutions from which we obtain clinical trial data) that are subject to privacy and security requirements under HIPAA. Depending on the facts and circumstances, we could be subject to criminal penalties if we knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA covered entity in a manner that is not authorized or permitted by HIPAA.
Certain states have also adopted comparable privacy and security laws and regulations, such as the California Confidentiality of Medical Information Act; these laws are not preempted by HIPAA to the extent that they are more stringent than HIPAA. California recently enacted the California Consumer Privacy Act (CCPA), which went into effect on January 1, 2020 and limits how companies can collect and use personal data. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA provides for fines and penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Although there are limited exemptions for certain health-related data, including clinical trial data, the CCPA may increase our compliance costs and potential liability. Other states are also considering similar privacy laws and the federal government may seek to enact a similar federal privacy law. We could be adversely affected if
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the CCPA and other state or federal legislation or regulations applicable to GRAIL require changes in our business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations.
Even when HIPAA does not apply, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards.
Compliance with data protection laws and regulations in the United States 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. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, the various regulatory frameworks for privacy and data protection are, and are likely to remain, uncertain for the foreseeable future, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules and subject our business practices to uncertainty.
We seek to utilize biological samples and data from participants in our clinical studies in accordance with applicable law, IRB stipulations, and participant permissions (through consent forms and HIPAA authorizations). If we are unable or significantly restricted in using participant samples and data for secondary research purposes, our ability to develop additional products and/or improve or refine existing products will be limited, which may impact our business and prospects.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. For example, European legislators adopted the General Data Protection Regulation (GDPR), which became effective on May 25, 2018, and superseded the prior European Union (EU) data protection legislation. The GDPR imposes more stringent data protection requirements, and provides for greater penalties for noncompliance. The GDPR is applicable in each EU and European Economic Area (EEA) member state and applies to companies established in the EU and EEA as well as companies that collect and use personal data to offer goods or services to, or monitor the behavior of, individuals in the EU and EEA, including, for example, through the conduct of clinical trials. The GDPR imposes stringent data protection obligations for processors and controllers of personal data. Among other things, the GDPR requires the establishment of a lawful basis for the processing of data, includes requirements relating to the consent of the individuals to whom the personal data relates, including detailed notices for clinical trial subjects and investigators, as well as requirements regarding the security of personal data and notification of data processing obligations or security incidents to appropriate data protection authorities or data subjects. We may face difficulty in fully complying with these regulations and any failure to do so could subject us to significant monetary penalties, liabilities, and adverse publicity. For example, because we collect personal data from EU data subjects as part of the SUMMIT study, including health data from participants enrolled in our clinical study in the United Kingdom, we are subject to the GDPR with respect to personal data collected in the study.
The GDPR prohibits, without an appropriate legal basis, the transfer of personal data to countries outside of the EEA, such as the United States, which are not considered by the European Commission to provide an adequate level of data protection. Although there are legal mechanisms to allow for the transfer of personal data from the EEA to the United States, recent legal developments in Europe have created complexity and uncertainty regarding such transfers of personal data. For example, on July 16, 2020, the Court of Justice of the European Union (CJEU) invalidated the EU-US Privacy Shield Framework (Privacy Shield) under which personal data could be transferred from the EEA to United States entities that had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures
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and/or contractual provisions may need to be put in place; however, the nature of these additional measures is currently uncertain. Additionally, other countries have passed or are considering passing laws requiring local data residency.
Penalties and fines for failure to comply with the GDPR are significant, including fines of up to €20 million or 4% of total worldwide annual revenue, whichever is higher. Additionally, following the United Kingdom’s withdrawal from the European Union, we will have to comply with both the GDPR and the data protection laws of the United Kingdom, which could be more or less stringent than the GDPR. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction, which exposes us to further compliance risk. It is currently unclear how the GDPR and the United Kingdom versions of data privacy legislation would inter-operate or what costs or difficulties complying with these two regimes will create for us or similarly situated companies.
If we or our partners fail to comply with federal, state, and foreign laboratory and other applicable licensing and registration requirements, we could be prevented from performing our tests or experience disruptions to our business.
CLIA is 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, or impairment of, or the assessment of the health of, human beings. CLIA regulations require, among other things, clinical laboratories to obtain a certificate and mandate specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, test management, and quality assurance. CLIA certification is also required for us to be eligible to bill state and federal healthcare programs, if such reimbursement is otherwise available, as well as many private third-party payors, for our products. To renew these certifications, we will be subject to routine surveys and inspections. Moreover, CLIA inspectors may make random or “for cause” inspections of our clinical laboratories.
In 2018, we received a CLIA Certificate of Registration from CMS for our laboratory in Menlo Park, California, to begin conducting moderate and/or high complexity testing, subject to inspection to determine compliance with the CLIA regulations. In 2019, we obtained College of American Pathologists (CAP) accreditation for our Menlo Park facility. While we have completed validation studies for an earlier version of Galleri, we are continuing our validation efforts for the version of Galleri that we intend to launch as an LDT. We may not successfully complete such validation. Any addition to our test menu requires notification to the regulatory and accrediting bodies that regulate our laboratory (e.g., CMS, the California Department of Public Health Laboratory Field Services (CALFS) and CAP) that we are adding a new specialty to our assay offerings. Further, before we are able to offer any products developed at our Durham, North Carolina laboratory, when and if we are able to complete construction, we will also be required to validate the products and provide the required notifications, certifications, permits, and accreditations to the regulatory and accrediting bodies that will regulate our North Carolina laboratory. At their discretion, any regulatory or accrediting body may come on-site to inspect our laboratory at any time. Any failure to pass inspections, maintain our CLIA Certificate of Registration, CAP accreditation, or state licenses, or add new validated products to our laboratory assay offerings could significantly harm our business, results of operations, and prospects.
In addition to obtaining federal certification for a laboratory under CLIA, we are also required to obtain and maintain state licenses to conduct testing in our laboratories. We have obtained a Clinical Laboratory Certificate of Deemed Status from the State of California Department of Public Health for our Menlo Park facility. The California licensure law establishes standards for the day-to-day operation of a clinical laboratory, including the training and skills required of personnel and quality control. In addition, California law mandates proficiency testing, which involves testing of specimens that have been specifically prepared for the laboratory. In the future, we will need to obtain a Clinical Laboratory Certificate of Deemed Status from the State of North Carolina Department of Public Health for our Durham facility. Further, if we test specimens originating from other states and return patient-specific results, our clinical laboratory must satisfy such states’ licensure laws as well to the extent that such laws regulate out-of-state laboratories that test specimens originating in such states. For example, to be able to receive specimens originating from New York, we must obtain and maintain a New York State Department of Health clinical
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laboratory permit. Research testing, however, does not require licensure if patient-specific results are not generated and/or returned for diagnostic purposes. We have applied for a New York State Department of Health clinical laboratory permit for our Menlo Park facility and we intend to apply for such a permit for our Durham facility, which we will need to obtain prior to accepting and generating for diagnosis or treatment purposes patient-specific results on specimens originating from New York at the applicable facility. Applicable New York laws and regulations establish standards for day-to-day operation of a clinical laboratory, including training and skill levels required of laboratory personnel, physical requirements of a facility, equipment, and validation and quality control. We believe that relevant New York regulatory authorities may be experiencing delays as a result of COVID-19 related issues, and there can be no assurance that we will be able to obtain New York clinical laboratory permits, or licenses or permits from any other states where we believe we will be required to be licensed or hold a permit, prior to commercial launch of our products, or at all. Failure to obtain such licenses or permits could expose us to fines and other penalties, or limit our potential testing population.
In connection with CLIA certification and state laboratory licensing and permitting, we remain subject to a number of risks in the event of noncompliance. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing licensure or permitting, or our failure to renew or maintain a CLIA certificate, a state license or permit, or accreditation (including CAP), could have a material adverse effect on our business and reputation. CMS also has the authority to impose a wide range of sanctions, including suspension, limitation, or revocation of the CLIA certification, termination of Medicare and Medicaid participation, civil money penalties, and a bar on the ownership or operation of a CLIA-certified laboratory by any owners or operators of the deficient laboratory. If we fail to obtain any required state licensure, or lose CLIA certification, CAP accreditation, or licensure once obtained, we would not be able to operate our clinical laboratories and offer our products in full or in particular states, which would adversely impact our business and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.
In addition to state laboratory licensing laws, we may also be subject to state registration and/or licensing requirements that apply to companies that manufacture medical devices. Certain states may require such registrations or licenses before the products are commercialized, including while manufacturers are evaluating the devices in clinical trials. Violations of these laws may result in the denial, suspension, or revocation of the registration or license, as well as other fines and penalties, including imprisonment.
Data from our clinical trials that we announce or publish from time to time before our trials are complete may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose then-available data from our clinical studies before the studies are complete, and the results and related findings and conclusions may be subject to change following the final analysis of the data related to the particular study or trial. This may happen for a number of reasons, including due to the stated protocol or because of the presentation of an abstract at a scientific conference, for example. As a result, the results that we report may differ from final results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully analyzed. As a result, such data should be viewed with caution until the final data are available. Additionally, such data from our clinical trials are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment and/or follow-up continues and more patient data become available. Significant adverse differences between initial or interim data and final data could significantly harm our reputation and business prospects.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, and our ability to receive regulatory clearance or approval or commercialize a particular product and our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding our business. If the data that we report differ
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from final results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to commercialize or obtain regulatory clearance or approval for, our products may be harmed, which could harm our reputation, business, operating results, prospects or financial condition.
Any product for which we obtain regulatory clearance or approval will be subject to extensive ongoing regulatory requirements, and we may be subject to penalties if we or our partners fail to comply with regulatory requirements or if we experience unanticipated problems with our products.
Any product for which we obtain regulatory clearance or approval from FDA or other regulators, along with the manufacturing processes, post-market surveillance, labeling, packaging, advertising, and promotion, distribution, storage, import, export, reporting, and recordkeeping for such product, will be subject to continued regulatory review, oversight, requirements, and periodic inspections by FDA and comparable foreign regulatory authorities. These requirements include submissions of safety and other post-marketing information and reports; registration and listing requirements; requirements relating to quality control, quality assurance, and corresponding maintenance of records and documents; requirements relating to recalls, removals, and corrections; and requirements relating to product labeling, advertising and promotion, and recordkeeping. The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales. FDA enforces these regulatory requirements through, among other means, periodic unannounced inspections. We do not know whether we will be found compliant in connection with any future regulatory inspections.
Regulatory clearance or approval of a test or device may be subject to limitations by the regulatory body as to the indicated uses for which the product may be marketed or to other conditions of clearance or approval. In addition, clearance or approval may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the test or device. After clearance or approval, discovery of problems with our product, suppliers, vendors, or contract manufacturers, or manufacturing processes (including software validation), and/or failure to comply with regulatory requirements, may result in actions such as:
•restrictions on operations of our laboratory;
•restrictions on manufacturing processes;
•restrictions on marketing of a product;
•Untitled or Warning letters;
•withdrawal or recall of the product from the market or seizure of the product;
•refusal to approve applications or supplements to approved applications that we may submit;
•fines, restitution or disgorgement of profits or revenue;
•suspension, limitation or withdrawal of regulatory approvals or clearances;
•exclusion from participation in U.S. federal or state healthcare programs, such as Medicare and Medicaid;
•safety communications;
•refusal to permit the import or export of our product;
•injunctions; or
•imposition of civil or criminal penalties.
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For any of our products that are approved or cleared by FDA, we will be required to report to FDA certain information about adverse medical events or malfunctions, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of FDA or another governmental authority, could have a negative impact on us.
For products for which we obtain FDA clearance or approval, we will be subject to FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of the product. If we fail to comply with our reporting obligations, FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance or approval, seizure of our products or delay in clearance or approval of future products.
FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. Product defects or other errors may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, FDA may require, or we may decide, that we will need to obtain new clearances or approvals for the device before we may market or distribute the corrected device. Seeking such clearances or approvals may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to FDA. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of FDA. If FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business and may harm our reputation and financial results.
To obtain and maintain FDA approvals or clearances, our products will need to be manufactured in accordance with federal and state regulations, and we could be forced to recall our devices or terminate production if we or our partners fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with FDA’s QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing
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facilities, which may include the facilities of subcontractors. Our products are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our products or manufacturing processes could result in, among other things: warning letters or untitled letters; fines, injunctions or civil penalties; suspension or withdrawal of approvals; seizures or recalls of our products; total or partial suspension of production or distribution; administrative or judicially imposed sanctions; FDA’s refusal to grant pending or future clearances or approvals for our products; clinical holds; refusal to permit the import or export of our products; and criminal prosecution of us, our suppliers, or our employees.
Any of these actions could significantly and negatively affect supply of our products. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and experience reduced sales and increased costs.
Healthcare reform measures, including recently enacted legislation reforming the U.S. healthcare system, and data protection measures, could cause significant harm to our business, operations and financial condition.
Healthcare systems are subject to ongoing reform in the United States and abroad. For example, in the United States, the Affordable Care Act (ACA) made a number of substantial changes to the way healthcare is financed both by governmental and private insurers. For example, the ACA imposed a 2.3% federal excise tax on manufacturers of certain medical devices, which was suspended in 2016, and repealed in December 2019. The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters, and fraud and abuse, which we expect will influence our industry and our operations in ways that we cannot currently predict.
Since its enactment, there have been judicial and congressional challenges to certain aspects of the ACA, and we expect there will be additional challenges and amendments to the ACA in the future. For example, the Tax Cuts and Jobs Act of 2017 includes a provision that entered into effect on January 1, 2019, that repeals the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” In December 2018, a U.S. district court held that the individual mandate was unconstitutional, which was upheld by the U.S. Court of Appeals for the Fifth Circuit. The Supreme Court of the United States granted certiorari on March 2, 2020, and the case is expected to be decided by mid-2021. We expect the Trump administration and Congress will likely continue to seek to modify, repeal, or otherwise invalidate all, or certain provisions of, the ACA. Complying with any new legislation or reversing changes implemented under the ACA could be time-intensive and expensive, resulting in a material adverse effect on our business.
Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight. Healthcare reform and pricing of drugs and medical devices, including clinical laboratory tests, are and will remain a key bipartisan issue. Policies to be pursued in the future may be more aggressive, regardless of which party controls the White House. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.
We cannot predict which healthcare reform measures will be implemented or the full impact of current or future healthcare reform measures on our business. For instance, a repeal of the ACA or payment reductions imposed by the ACA, as well as the expansion of the federal and state governments’ role in the U.S. healthcare industry generally and the social, governmental and other pressures to reduce healthcare costs while expanding individual benefits, could limit the prices we will be able to charge or the amount, if any, of available reimbursement for products, which would reduce our potential revenue and have a material adverse effect on our business, financial condition, results of operations, and cash flows.
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Obtaining and maintaining regulatory authorization of our products in one jurisdiction does not mean that we will be successful in obtaining regulatory authorization of our products in other jurisdictions.
Obtaining and maintaining regulatory authorization of products in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory authorization in any other jurisdiction, but a failure or delay in obtaining regulatory authorization in one jurisdiction may have a negative effect on the regulatory authorization process in others. For example, even if FDA or a comparable foreign regulatory authority grants clearance or approval of our products, comparable regulatory authorities in foreign jurisdictions may also need to authorize the products in those countries, which may be a de novo review process. Premarket authorization processes vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States, including additional clinical studies, because clinical studies conducted in one jurisdiction may not be accepted by regulatory authorities in other jurisdictions or the data may not be considered applicable to the jurisdiction’s intended patient population. In some cases, the price that we intend to charge for our products may also be subject to approval.
Obtaining foreign regulatory authorization and maintaining compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for us and could delay or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in other jurisdictions, or we fail to receive necessary or desirable marketing authorizations in other jurisdictions, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.
Our employees, independent contractors, consultants, commercial partners, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.
We are exposed to the risk of fraud, misconduct, or other illegal activity by our employees, independent contractors, consultants, commercial partners, and vendors. Misconduct by these parties could include intentional, reckless and negligent conduct that fails to: comply with the rules and regulations of the CMS, FDA, and other comparable foreign regulatory authorities; provide true, complete and accurate information to such regulatory authorities; comply with manufacturing and clinical laboratory standards; comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws; or report financial information or data accurately or to disclose unauthorized activities to us. When we begin commercializing our products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. In particular, research, sales, marketing, education, and other business arrangements in the healthcare industry are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing, and other abusive practices, as well as off-label product promotion. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, educating, marketing and promotion, sales and commission, certain customer incentive programs, and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of participant recruitment for clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct by employees and third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions. Even if it is later determined after an action is instituted against us that we were not in violation of these laws, we may be faced with negative publicity, incur significant expenses defending our actions, and have to divert significant management resources from other matters.
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If we fail to comply with healthcare and other applicable laws and regulations, we could face substantial penalties and our business, reputation, and operations and financial condition could be adversely affected.
Our operations are subject to various U.S. federal and state fraud and abuse laws. In addition, the commercialization of our products outside the United States would also subject us to foreign equivalents of the healthcare laws described below, among other foreign laws. The laws that may impact our operations include:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering, or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item, or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation, and many courts have interpreted that statute as being violated if merely one purpose of any arrangement is to induce referrals or purchases. In 2018, Congress enacted the Eliminating Kickbacks in Recovery Act of 2018 (EKRA), which establishes an all-payor anti-kickback prohibition for, among other things, knowingly and willfully paying or offering any remuneration directly or indirectly to induce a referral of an individual to a clinical laboratory. Violations of EKRA may result in fines, imprisonment, or both, for each occurrence;
•the federal physician self-referral prohibition, commonly known as the Stark Law, which, in the absence of an applicable exception, prohibits a physician from making a referral for certain designated health services covered by the Medicare or Medicaid program, including clinical laboratory services, if the physician or an immediate family member of the physician has a financial relationship with the entity providing the designated health services. The Stark Law also prohibits the entity furnishing the designated health services from billing, presenting or causing to be presented a claim for the designated health services furnished pursuant to the prohibited referral;
•federal civil and criminal false claims laws, including the False Claims Act, which impose criminal and civil penalties, including through civil “qui tam” or “whistleblower” actions, against individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other third-party payors that are false or fraudulent. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
•healthcare fraud and false statements laws, which prohibit, among other things, knowingly making a false statement to improperly avoid, decrease, or conceal an obligation to pay money to the federal government. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them in order to have committed a violation;
•the federal Civil Monetary Penalties Law, which, subject to certain exceptions, prohibits, among other things, the offer or transfer of remuneration, including waivers of copayments and deductible amounts (or any part thereof), 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;
•the federal Physician Payment Sunshine Act, created under the ACA, and its implementing regulations, which require manufacturers of drugs, devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the U.S. Department of Health and Human Services under the Open Payments Program, information related to payments or other transfers of value made to physicians (as defined by statute) and teaching hospitals and, for transfers of value made beginning in 2021, to other healthcare practitioners, as well as ownership and investment interests held by such physicians and their immediate family members;
•federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and
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•analogous state and foreign laws and regulations, such as state and foreign anti-kickback, false claims, consumer protection, and unfair competition laws that may apply to our business practices, including but not limited to, research, distribution, sales and marketing arrangement as well as submitting claims involving healthcare items or services reimbursed by any third-party payor, including commercial insurers; state laws that require healthcare companies to comply with the medical device industry’s voluntary compliance guidelines, the relevant compliance guidance promulgated by the federal government that otherwise restricts payments that may be made to healthcare providers, and other potential referral sources or state-specific standards on financial interactions with healthcare providers; state laws that require healthcare companies to file reports with states regarding pricing and marketing information, such as the tracking and reporting of gifts, compensation, and other remuneration and items of value provided to healthcare professionals and entities; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available and lack of clear guidance, it is possible that some of our business activities could, despite our efforts to comply, be subject to challenge under one or more of such laws. Efforts to ensure that our business arrangements will comply with applicable healthcare and other applicable laws may involve substantial costs. In the future, it is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or then-existing statutes, regulations, or case law interpreting applicable fraud and abuse or other healthcare or applicable laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal, and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
If we or any contract manufacturers and suppliers we engage fail to comply with environmental, health, and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We and any contract manufacturers and suppliers we engage are subject to numerous federal, state, and local environmental, health, and safety laws, regulations, and permitting requirements, including those governing laboratory procedures; the generation, labeling, handling, use, storage, transport, treatment, and disposal of hazardous and regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air, and water; and employee health and safety. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. Under certain environmental laws, we could be held responsible for costs relating to any contamination at our current or past facilities and at third-party facilities. We also could incur significant costs associated with civil or criminal fines and penalties. If the handling, use, labeling, storage, or transport of hazardous or biohazardous materials by us or our contract manufacturers or suppliers fail to comply with applicable requirements, we could incur significant costs, be subject to civil or criminal fines and penalties, experience disruption and delays in our operations, and face destruction of any non-compliant materials, which could include clinical and biological samples.
Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our research, product development and manufacturing efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not carry specific biological or hazardous waste insurance coverage. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical studies or regulatory approvals could be suspended, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
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Changes in funding or disruptions at FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.
The ability of FDA to review and clear or approve new products or changes to existing products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, FDA’s ability to hire and retain key personnel and accept the payment of user fees, federal government shutdowns, and other events that may otherwise affect FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at FDA and other agencies may also slow the time necessary for new medical devices or modifications to cleared or approved medical devices to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the COVID-19 pandemic, on March 10, 2020, FDA announced its intention to postpone most inspections of foreign manufacturing facilities, and on March 18, 2020, FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent or delay FDA or other regulatory authorities from conducting, at all or in a timely manner, their regular inspections, reviews, or other regulatory activities (including pre-submission engagements), it could significantly impact the ability of FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
Our business activities are subject to the FCPA and similar anti-bribery and anti-corruption laws.
Our business activities are subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations, or rules of other countries in which we operate, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S. governments. Additionally, in many other countries, the healthcare providers who administer diagnostic tests are employed by their government, and the purchasers of diagnostics tests are government entities; therefore, our dealings with these providers and purchasers are subject to regulation under the FCPA. The SEC and Department of Justice have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies. There is no certainty that all of our employees, agents, contractors, or collaborators, or those of our affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, the closing down of our facility, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.
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Risks Related to Intellectual Property
If we are unable to obtain and maintain intellectual property protection for our technology, or if the scope of the intellectual property protection we obtain is not sufficiently broad, our competitors could develop and commercialize technology and tests similar or identical to ours, and our ability to successfully commercialize our products may be impaired.
Our ability to compete successfully will depend in part on our ability to obtain and enforce patent protection for our products, preserve our trade secrets and operate without infringing the proprietary rights of third parties. Filing, prosecuting, and defending patents on our products and other technologies in all countries throughout the world would be prohibitively expensive and time-consuming, and the laws of some foreign countries may not protect our rights to the same extent as the laws of the United States. We may not be able to file, prosecute, maintain, enforce, or license all necessary or desirable patents or patent applications at a reasonable cost or in a timely manner, or in all jurisdictions, or at all, or may choose not to do any of the foregoing. Furthermore, in some cases, we have only filed provisional patent applications on certain aspects of our products and technologies and each of these provisional patent applications, or any future provisional patent application on certain aspects of our products and technologies, is not eligible to become an issued patent until, among other things, we file a non-provisional patent application within 12 months of the filing date of the applicable provisional patent application. In cases where we have not obtained, or decided not to obtain, patent protection for certain of our inventions, we may not be able to prevent third parties from practicing our inventions or from selling or importing tests made using our inventions in and into the United States or other jurisdictions.
Moreover, while we have applied for patents that protect aspects of our technology in the United States and several other countries, we cannot assure you that our intellectual property position, including our owned and exclusively licensed pending and issued patents, will not be challenged or that all patents for which we have applied will be issued on a timely basis or at all, or that such patents will protect our technology, in whole or in part, or be issued in a form that will provide us with meaningful protection, prevent competitors from competing with us, or otherwise provide us with any competitive advantage. Although patents are presumed valid and enforceable upon issuance, a patent may be challenged as to its inventorship, scope, validity, or enforceability, and certain of our owned or exclusively in-licensed patents have been, and others in the future may be, challenged in the courts or patent offices in the United States and abroad. For example, three of our European patents were subject to oppositions in Europe, as described below. As a result of such challenges, our pending or future patent applications may not result in issued patents, or the scope of existing or future patents may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours, or our issued patents may be held invalid or unenforceable. It is also possible that we may fail to identify patentable technologies in a timely fashion, which could impair our ability to obtain patent protection on such technology at all. Our competitors may be able to circumvent our owned or exclusively in-licensed patents by developing similar or alternative technologies or tests in a non-infringing manner. Competitors could also set up laboratories outside the countries in which we have filed patent applications in order to compete without infringing upon our intellectual property, even if they process samples from countries in which we do have patent protection. In addition, to the extent we have granted, or may grant in the future, licenses or sublicenses of our intellectual property rights to third parties, we cannot provide any assurance that such intellectual property rights will not be used by those third parties in a manner that could compete with our business or otherwise negatively impact any competitive advantage provided by such intellectual property rights.
Publications of discoveries in scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot know with certainty whether we were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or that we were the first to file for patent protection of such inventions. As a result, the issuance, scope, validity, enforceability, and commercial value of our patent rights are uncertain. Given the amount of time required for the development, testing, and regulatory review of new tests, patents protecting such tests might expire before or shortly after such products are commercialized. As a result, our owned or exclusively in-licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
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If a third party obtains an issued patent on inventions we use in our products, that party could prevent us from using those inventions, and we may not be able to design around the third party’s patents or obtain a license on commercially reasonable terms, if at all. Third-party patents or other intellectual property may exist that our current technology, manufacturing methods, products, or future methods or tests infringe or will infringe, which could result in litigation, the imposition of injunctions preventing our use of the foregoing, or require us to obtain licenses or pay royalties and/or other forms of compensation to third parties, which could be significant and could harm our results of operations.
Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on patents and applications will be due to be paid to the U.S. Patent and Trademark Office (USPTO) and various government patent agencies outside of the United States over the lifetime of our owned or in-licensed patents and applications. In certain circumstances, we rely on our licensing partners to pay these fees due to U.S. and non-U.S. patent agencies and to take the necessary actions to comply with other requirements to maintain such in-licensed patents during their term. In some cases, non-compliance can result in abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar or identical tests or technology, which could have a material adverse effect on our competitive position.
If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.
We have agreements with Illumina and license agreements with The Chinese University of Hong Kong, among others, that provide rights to certain technologies related to assays used in our products. We may need to obtain additional licenses from others to advance our research or allow commercialization of our products or technology without infringing the intellectual property of third parties. It is possible that we may be unable to obtain such additional licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and resources to redesign our technology or to develop or license replacement technology, any of which may not be feasible on a technical or commercial basis. If we are unable to obtain or maintain applicable licenses, we may be unable to commercialize certain of our products or continue to utilize our technology, which could harm our business, financial condition, results of operations, and prospects.
In addition, our in-licenses impose various development, diligence, commercialization, and other obligations on us, and we expect that our future license or development agreements will contain similar types of obligations. Certain of our license agreements also require us to meet development timelines, or to exercise commercially reasonable efforts to develop and commercialize licensed products, including, for example, analyzing a minimum number of samples using the applicable product within a certain number of years, in order to maintain the licenses. Despite our efforts, our licensors might conclude that we have materially breached our obligations under such license agreements or our sublicensees may fail to fulfill their obligations to us or materially breach our related sublicense agreements, and our licensors might therefore terminate the license agreements or otherwise modify our rights under those agreements, thereby removing or limiting our ability to develop and commercialize products and technology covered by these license agreements or resulting in litigation. If these in-licenses are terminated, or if the underlying patents fail to provide the anticipated market exclusivity, competitors or other third parties may have the freedom to seek regulatory approval of, and to market, tests highly similar to ours or we may be required to cease commercialization of our products or use of our technology. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.
In addition, the agreements under which we currently license or otherwise obtain rights to intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations, which may lead to disputes between us and our licensor, including:
•the scope of rights granted under the license agreement;
•the extent to which our product and technology infringe on intellectual property of the licensor that is not subject to the license agreement;
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•the right to sublicense patent and other rights under our collaborative development relationships;
•our diligence and other obligations under the license agreement; and
•the ownership of inventions and know-how resulting from the joint invention of intellectual property by us and our licensors and our partners.
The resolution of any contract disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects. If we are required to engage in litigation to enforce or defend our rights under our license or development agreements, even if we are successful, such litigation could require significant financial resources, divert the attention of management and harm our business. Moreover, if disputes over intellectual property that we have licensed or otherwise obtained rights to prevent or impair our ability to maintain our current arrangements on commercially acceptable terms, or at all, we may be unable to successfully commercialize the affected product or technology, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Our use of open-source software could subject our proprietary technology to unwanted open-source license conditions that could negatively impact our business.
A portion of our technology capabilities incorporates open-source software, and we may incorporate open- source software into other offerings or products in the future. If an author or other third party that distributed such open-source software to us were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations. Further, the outcome of such litigation may be particularly uncertain in some cases, because there is little legal precedent governing the interpretation of certain terms of common open source licenses. In addition, if we combine our proprietary software with open-source software in a certain manner and make it available to others, under some open-source licenses, we could be required to license or make available the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours and harm our business.
Developments in patent law could have a negative impact on our business.
From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress, the USPTO, or applicable authorities in other jurisdictions may change the standards of patentability and any such changes could have a negative impact on our business.
Several decisions from the U.S. Supreme Court regarding patentable subject matter are of particular relevance to patents in the medical diagnostics and computer-implemented applications space. The 2012 decision in Mayo Collaborative v. Prometheus Laboratories (Prometheus) concerns patent claims directed to optimizing the amount of drug administered to a specific patient based on certain diagnostic measurements. The Supreme Court held that the applicable patent’s claims were directed to a law of nature (i.e., a natural correlation between drug levels and efficacy or toxicity) and failed to incorporate a sufficiently inventive concept above and beyond routine and conventional method steps to allow the claimed methods of treatment to qualify as patent eligible. The 2013 decision in Association for Molecular Pathology v. Myriad Genetics (Myriad) concerns the patentability of isolated DNA sequences that were related to methods of diagnosing genetic predisposition to cancer. The Supreme Court held that isolated fragments of naturally occurring genetic material are not patent eligible, but non-naturally occurring fragments can be patented. The 2014 decision in Alice Corporation Pty. Ltd. v. CLS Bank International (Alice) concerns a computer-implemented, electronic escrow service for facilitating financial transactions. The Supreme Court held that an abstract idea could not be patented just because it is implemented on a computer, thus providing guidance on the patentability of computer-implemented applications such as our products. Our efforts to seek patent protection for our technologies and products may be negatively impacted by the Prometheus, Myriad, and Alice decisions, rulings in other cases, or guidance or procedures issued by the USPTO or authorities in other jurisdictions.
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We cannot fully predict the impact of the Prometheus, Myriad, and Alice decisions or other decisions that have been made or in the future may be made by other authorities on our ability, or the ability generally of genomic testing, biopharmaceutical, or other companies, to obtain or enforce patents relating to DNA, genes, genomic-related discoveries, or computer-implemented tests, including such tests that use machine learning or rely on software pipelines, in the future, as the contours of whether claims are patent eligible, or recite laws of nature, natural phenomena, natural products, or abstract ideas are not clear and may take years to develop via interpretation at the USPTO and in the courts. There are many previously issued patents claiming nucleic acids and diagnostic methods based on natural correlations that issued before these recent Supreme Court decisions and, although many of these patents may be invalid under the standards set forth in these decisions, these patents are presumed valid and enforceable until they are successfully challenged. Thus, third parties holding these patents could allege that we infringe, or request that we obtain a license under, these patents, even if these patents are not likely enforceable under current U.S. laws. Whether based on patents issued prior to or after these Supreme Court decisions, we could be forced to defend against claims of patent infringement or obtain license rights, if available on commercially reasonable terms or at all, under these patents. In jurisdictions other than the United States, gene-related patent claims may remain valid and may be enforced against us.
Further, the U.S. Congress has periodically sought to pass bills concerning subject matter eligible for patent protection. We cannot fully predict the impact that such new laws may have on our ability to obtain patent protection on our products and technologies, and our ability to operate in view of the patents controlled by third parties.
These and other substantive changes to U.S. and foreign patent law could affect our susceptibility to patent infringement claims and our ability to obtain patents and, if obtained, to enforce or defend them, any of which could have a material adverse effect on our business.
Patent terms may be inadequate to protect our competitive position on our products for an adequate amount of time.
Patents have a limited lifespan in all jurisdictions around the world. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product are obtained, once the patent life has expired for a product, we may be open to competition. Given the amount of time required for the development, testing and regulatory review of new products, patents protecting such products might expire before or shortly after such products are commercialized. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing product candidates similar or identical to ours for a meaningful amount of time, or at all. Such an inability to exclude competitors from commercializing similar or identical products could have a material adverse impact on our reputation, business, financial condition, results of operations and business prospects.
Issued patents covering our products and other technologies could be found invalid or unenforceable if challenged in court or before administrative bodies in the United States and abroad.
Third parties may challenge the validity or enforceability of our owned or in-licensed patents in court or before administrative bodies in the United States or abroad. If we or one of our licensors initiated legal proceedings against a third party to enforce a patent, the defendant could counterclaim that our asserted patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, lack of subject matter eligibility, lack of written description, and non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a material misleading statement, during prosecution. Third parties have raised, and in the future may raise, claims challenging the validity or enforceability of our owned or in-licensed patents before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post-grant review, inter partes review, interference proceedings, derivation proceedings, and equivalent proceedings in foreign jurisdictions (such as opposition proceedings). Such proceedings could result in the revocation of, cancellation of, or amendment to our patents in such a way that they no longer cover Galleri, DAC or other technologies or products.
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For example, we recently faced three patent oppositions in Europe with respect to European patent numbers EP 2 823 062 B1 and EP 2 898 100 B1, in-licensed from The Chinese University of Hong Kong, and European patent number EP 2 814 959 B1, in-licensed from the Fred Hutchinson Cancer Research Center. These opposition proceedings concluded with granted European patent numbers EP 2 823 062 B1 and EP 2 898 100 B1 being maintained based on claim amendments entered during the opposition proceedings and with EP 2 814 959 B1 being revoked. This revocation applies only in Europe, does not affect our patents outside of Europe and represents technology that is not currently being used in Galleri or DAC. We and the Fred Hutchinson Cancer Research Center have appealed the opposition division’s decision revoking EP 2 814 959 B1, but the outcomes of legal assertions of invalidity and unenforceability are unpredictable. For example, we cannot be certain that there is no invalidating prior publications or inventions, of which we or our licensing partners and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our products or other technologies. Such a loss of patent protection could have a material adverse impact on our business, financial condition, results of operations, and prospects.
We may be subject to claims by third parties asserting that our employees or we have infringed or misappropriated intellectual property rights, or to assertions by third parties or employees claiming ownership of what we regard as our own intellectual property.
Our former, current, and future employees may have been previously employed at universities or other biotechnology, diagnostic technology, or pharmaceutical companies, including our competitors or potential competitors and strategic partners. We train our employees not to bring or use proprietary information or technology from former employers to us or use it in their work. Although we try through such training and other measures to ensure that our employees do not use the proprietary information or know-how of others in their work for us, we have been in the past, and in the future may be, subject to claims that an employee or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of such employee’s former employer. Litigation, which would be expensive, time-consuming, a distraction to management, and uncertain of outcome, may be necessary to defend against these claims.
In addition, while it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing or enforcing such an agreement with each party who in fact develops intellectual property that we regard as our own. Our and their assignment agreements may be breached, and we may be forced to bring claims against third parties or current or former employees, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.
If we fail to prevail on any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, or be required to obtain a license, which may not be available to us on commercially reasonable terms or at all. Even if we are successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management, which could harm our business.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for our products and other technologies, we also rely on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, data, and other proprietary information and to maintain our competitive position. Trade secrets and know-how can be difficult to protect. We expect our trade secrets and know-how to over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology, and the movement of personnel from academic to industry scientific positions.
We seek to protect these trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, directors, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, suppliers, service providers, consultants, advisors, and other third parties. We also enter into confidentiality and invention or patent assignment
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agreements with our employees and consultants, and remind departing employees when they leave their employment of their continuing confidentiality obligations. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. Despite our efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive, and time-consuming, and the outcome is unpredictable. Some courts outside the United States are less willing or unwilling to protect trade secrets. For example, in China, claims regarding infringement or misappropriation of trade secrets are difficult to prove, and consequently plaintiffs are rarely successful in bringing these claims. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be misappropriated by, disclosed to, or independently developed by a competitor or other third party, our competitive position could be materially and adversely harmed.
We have and may enter into collaboration, license, contract research and/or manufacturing relationships with contract organizations that operate in certain countries that are at heightened risk of theft of technology, data, and intellectual property through direct intrusion by private parties or foreign actors, including those affiliated with or controlled by state actors. Accordingly, our efforts to protect and enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license, and we may be at heightened risk of losing our proprietary intellectual property rights around the world, including outside of such countries, to the extent such theft or intrusion destroys the proprietary nature of our intellectual property.
Our success depends on our ability to develop and commercialize our technology without infringing, misappropriating, or otherwise violating the intellectual property of third parties. Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, and if they prevail, could block sales of our products and force us to make large damages and/or royalty payments, which could have a material adverse effect on the success of our business.
Our commercial success in part depends upon our ability, and the ability of our collaborators, to market, sell, and distribute our products and use our proprietary technologies without infringing, misappropriating, or otherwise violating the proprietary rights of third parties. There is considerable intellectual property litigation in the medical technology, biotechnology, diagnostic, and pharmaceutical industries. In addition, there is ongoing intellectual property litigation in the circulating nucleic acid analysis and cancer nucleic acid space, the outcome of which could also impact future litigation involving our intellectual property or our ability to commercialize our products. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products, including interference proceedings before the USPTO and similar bodies in other jurisdictions. Third parties may assert infringement claims against us based on existing patents or patents that may be issued in the future.
If we are found to infringe, misappropriate, or otherwise violate a third party’s intellectual property rights, we could be required to obtain a license from such third party to continue developing, marketing, selling, and distributing our products, or to cease using the infringing technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In addition, we could be found liable for monetary damages, including treble damages if we are found to have willfully infringed a patent and attorneys’ fees if the court finds the case to be exceptional. A finding of infringement, misappropriation, or other violation could prevent us from commercializing our products or force us to cease some of our operations, which could materially harm our business. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our personnel from their normal responsibilities. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial
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or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the market place.
Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common stock to decline.
During the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as well as results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our existing products, programs or intellectual property could be diminished. Accordingly, the market price of shares of our common stock may decline. Such announcements could also harm our reputation or the market for our future products, which could have a material adverse effect on our business.
We may become involved in lawsuits to protect or enforce or defend our patents, which could be expensive, time-consuming and unsuccessful.
Our patents and any patents which we in-license may be challenged, narrowed, invalidated or circumvented. If our patents are invalidated or otherwise limited or will expire prior to the commercialization of our products, other companies may be better able to develop products that compete with ours, which could adversely affect our competitive position, business prospects, results of operations, and financial condition.
The following are examples of litigation and other adversarial proceedings or disputes that we could become a party to involving our patents or patents licensed to us:
•we or our collaborators may initiate litigation or other proceedings against third parties to enforce our patent rights;
•third parties may initiate litigation or other proceedings seeking to invalidate patents owned by us or that are licensed to us or to obtain a declaratory judgment that their product or technology does not infringe our patents or patents licensed to us or that such patents are invalid or unenforceable;
•third parties have initiated, and in the future may initiate, oppositions, inter partes review, post grant review, or reexamination proceedings challenging the validity or scope of our patent rights, requiring us or our collaborators and/or licensors to participate in such proceedings to defend the validity and scope of our patents;
•there may be a challenge or dispute regarding inventorship or ownership of patents currently identified as being owned by or licensed to us;
•at our initiation or at the initiation of a third party, the USPTO may initiate an interference between patents or patent applications owned by or licensed to us and those of our competitors, requiring us or our collaborators and/or licensors to participate in an interference proceeding to determine the priority of invention, which could jeopardize our patent rights; or
•third parties may seek approval to market products similar to our future approved products prior to expiration of relevant patents owned by or licensed to us, requiring us to defend our patents, including by filing lawsuits alleging patent infringement.
These lawsuits and proceedings would be costly and could affect our results of operations and divert the attention of our managerial, legal, and scientific personnel. There is a risk that a court or administrative body would decide that our owned or exclusively in-licensed patents are invalid or not infringed by a third party’s activities, or that the scope of certain issued claims must be limited. An adverse outcome in a litigation or proceeding involving our owned or exclusively in-licensed patents could limit our ability to assert our patents against competitors, affect our ability to receive royalties or other licensing consideration from our licensees or sublicensees, and may curtail or
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preclude our ability to exclude third parties from making, using and selling similar or competitive products. We may become more susceptible to these types of lawsuits and proceedings given the proliferation of organizations pursuing intellectual property protections in the cfNA space. Any of these occurrences could adversely affect our competitive business position, business prospects and financial condition.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our application to register the “Galleri” mark and logo (for our multi-cancer test) and some of our applications to register the “GRAIL” mark and the logos associated with GRAIL in the United States are pending and we cannot assure you that our pending trademark applications will be approved. In addition, our registered or unregistered trademarks or trade names may be challenged, infringed or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we view as valuable to building name recognition among potential partners and customers in our markets of interest. At times, competitors or other third parties have adopted or may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion and/or litigation. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. 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. Our efforts to enforce, protect, or defend our proprietary rights related to trademarks may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.
Risks Related to This Offering and Ownership of Our Common Stock
We do not know whether a market will develop for our common stock or what the market price of our common stock will be. As a result, it may be difficult for you to sell your shares of our common stock.
There is currently no public trading market for our common stock. If a market for our common stock does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. It is possible that in one or more future periods our results of operations, clinical study results, regulatory approval process, and progression of our product pipeline may not meet the expectations of securities research analysts and investors. As a result of these and other factors, the price of our common stock may fall.
The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering.
The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may differ from the market price of our common stock after the offering. As a result, you may not be able to sell your common stock at or above the initial public offering price. Some of the factors that may cause the market price of our common stock to fluctuate include:
•the timing of launch of our products, including Galleri and DAC, and the degree to which the launch and commercialization thereof meets the expectations for securities analysts and investors;
•the timing and results of clinical studies for our products;
•commencement or termination of collaborations for our product development and research programs;
•failure or discontinuation of any of our product development and research programs;
•the success of existing or new competitive tests, services, or technologies;
•results of clinical studies, or regulatory approvals of diagnostic tests of our competitors, or announcements about new research programs or diagnostic tests of our competitors;
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•regulatory or legal developments in the United States and other countries;
•developments or disputes concerning patent applications, issued patents, or other proprietary rights;
•the impact of COVID-19 on our business and on global economic conditions;
•the recruitment or departure of key personnel;
•the level of expenses related to any of our research programs or clinical development programs;
•actual or anticipated changes in our estimates as to our financial results or development timelines;
•whether our financial results, forecasts, and development timelines meet the expectations of securities analysts or investors;
•announcement or expectation of additional financing efforts;
•sales of our common stock by us, our insiders, or other stockholders;
•expiration of market standoff or lock-up agreements;
•variations in our financial results or those of companies that are perceived to be similar to us;
•changes in estimates or recommendations by securities analysts, if any, that cover our stock;
•changes in the structure of healthcare payment systems, including changes that would affect coverage and reimbursement by third-party payors;
•market conditions in the healthcare sector;
•general economic, industry, and market conditions; and
•the other factors described in this “Risk Factors” section.
In recent years, stock markets in general, and the market for healthcare companies in particular (including companies in the biotechnology, diagnostics, and related sectors), have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume fluctuations. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. Following periods of such volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Because of the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the research and reports that industry or securities analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by industry or securities analysts. If no or few analysts commence coverage of us, the trading price of our stock could decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.
Sales of a substantial number of shares of our common stock 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 could occur at any time following the expiration of the market standoff and lock-up agreements or the early release of these agreements or
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the perception in the market that the holders of a large number of shares of common stock intend to sell shares, and could reduce the market price of our common stock. After this offering, we will have a single class of common stock, of which          shares of common stock will be outstanding. Of these shares, the          shares we are selling in this offering may be resold in the public market immediately, unless purchased by our affiliates. Substantially all of the remaining shares of our common stock that will be outstanding after this offering are currently prohibited or otherwise restricted under securities laws, market standoff agreements entered into by our stockholders with us, or lock-up agreements entered into by our stockholders with the underwriters; however, subject to applicable securities law restrictions and excluding shares of restricted stock that will remain unvested, these shares will be able to be sold in the public market beginning 180 days after the date of this prospectus. The representatives may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. Shares issued upon the exercise of stock options outstanding under our equity incentive plans or pursuant to future awards granted under those plans will become available for sale in the public market to the extent permitted by the provisions of applicable vesting schedules, any applicable market standoff and lock-up agreements, and Rule 144 and Rule 701 under the Securities Act of 1933, as amended (the Securities Act). See the section titled “Shares Eligible for Future Sale” for additional information.
Moreover, after this offering, holders of an aggregate of          shares of our common stock will have rights, subject to conditions, to require us to file registration statements with the SEC covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also plan to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock-up agreements described in the section titled “Underwriting” in this prospectus. If any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.
You will incur immediate and substantial dilution as a result of this offering.
If you purchase common stock in this offering, you will incur immediate and substantial dilution of $         per share, representing the difference between the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and our pro forma net tangible book value per share after giving effect to this offering and reclassification of all of our outstanding Class A common stock, Class B common stock, and redeemable convertible preferred stock into a single class of common stock prior to the closing of the offering. As of June 30, 2020, there were 98,033,707 shares of common stock issuable upon exercise of outstanding stock options with a weighted-average exercise price of $1.62 per share and 30,343,670 shares of common stock issuable upon the vesting and settlement of outstanding RSUs. To the extent that these outstanding options or RSUs, or any other rights, are exercised, or we issue additional equity or convertible securities in the future, or the underwriters exercise their option to purchase additional shares, you will incur further dilution. See the section titled “Dilution” for a further description of the dilution you will experience immediately after this offering.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations, or require us to relinquish rights to our technologies or our products.
We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships, and alliances and licensing arrangements. We, and indirectly, our stockholders, will bear the cost of issuing and servicing securities issued in any such transactions. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings. To the extent that we raise additional capital through the sale of equity or debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Additionally, any future collaborations we enter into with third parties may provide capital in the near term but limit our potential cash
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flow and revenue in the future. If we raise additional funds through strategic partnerships, alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or our products, or grant licenses on terms unfavorable to us. Certain of the foregoing transactions may require us to obtain stockholder approval, which we may not be able to obtain.
Insiders will continue to have substantial influence over us after this offering, which could limit your ability to affect the outcome of key transactions, including a change of control.
After this offering, our directors, executive officers, holders of more than 5% of our outstanding stock, and their respective affiliates will beneficially own shares representing approximately          % of our outstanding common stock. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). For so long as we remain an emerging growth company, we are permitted by SEC rules and plan to rely on exemptions from certain disclosure requirements that are applicable to other SEC-registered public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX Section 404), not being required to comply with the auditor requirements to communicate critical audit matters in the auditor’s report on the financial statements, reduced disclosure obligations regarding executive compensation, 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. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we 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.
In addition, 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. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised 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.
We will incur increased costs as a result of operating as a public company. Our management will be required to devote substantial time to new compliance initiatives and corporate governance practices.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. SOX Section 404, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Listing Rules, and other applicable U.S. rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance, and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company, and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more
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difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Pursuant to SOX Section 404, we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the SEC after we become a public company. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section titled “Use of Proceeds” in this prospectus. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business, financial condition, results of operations and prospects. 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 expect to pay any dividends for the foreseeable future. Investors in this offering may never obtain a return on their investment.
You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. In addition, any future credit facility or debt securities may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.
Delaware law and provisions in our amended and restated certificate of incorporation and bylaws that will be in effect prior to the closing of this offering might discourage, delay, or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions in our amended and restated certificate of incorporation and bylaws that will be in effect prior to the closing of this offering may discourage, delay, or prevent a merger, acquisition, or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our organizational documents will:
•establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms;
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•provide that our directors may be removed only for cause;
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
•eliminate cumulative voting in the election of directors;
•authorize our board of directors to issue shares of preferred stock and determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;
•permit stockholders to take actions only at a duly called annual or special meeting and not by unanimous written consent;
•prohibit stockholders from calling a special meeting of stockholders;
•require that stockholders give advance notice to nominate directors or submit proposals for consideration at stockholder meetings;
•authorize our board of directors, by a majority vote, to amend certain provisions of the bylaws; and
•require the affirmative vote of at least          % or more of the outstanding shares of common stock to amend many of the provisions described above.
In addition, Section 203 of the General Corporation Law of the State of Delaware (DGCL) prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, which is generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our common 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, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
•any derivative action or proceeding brought on our behalf;
•any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees, or stockholders to us or our stockholders;
•any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation and bylaws; and
•any action asserting a claim governed by the internal affairs doctrine.
However, this provision would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction. Furthermore, our amended and restated certificate of incorporation will also provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Any person
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purchasing or otherwise acquiring or holding any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds more favorable for disputes with us or with our directors, officers, other employees or agents, or our other stockholders, which may discourage such lawsuits against us and such other persons. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, results of operations and financial condition.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because healthcare companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of our management’s attention and resources, which could harm our business.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, particularly in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” In some cases, you can identify these statements by forward-looking words such as “aim,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should,” “would,” or “will,” the negative of these terms, and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include expectations and projections of our future financial performance, future tests or products, technology, clinical studies, regulatory compliance, potential market opportunity, anticipated growth strategies, and anticipated trends in our business.
These statements are only predictions based on our current expectations and projections about future events and trends. There are important factors that could cause our actual results, level of activity, performance, or achievements to differ materially and adversely from those expressed or implied by the forward-looking statements, including those factors discussed under “Risk Factors.” You should specifically consider the numerous risks described under “Risk Factors.” Moreover, we operate in a 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, level of activity, performance, or achievements to differ materially and adversely from those contained in any forward-looking statements we may make.
Although we believe the expectations and projections expressed or implied by the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Except to the extent required by law, we undertake no obligation to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations or to reflect new information or the occurrence of unanticipated events. Given these risks, uncertainties, and assumptions, you are cautioned not to place undue reliance on such forward-looking statements as predictions of future performance or otherwise.
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INDUSTRY AND MARKET DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information from various sources on assumptions that we have made that are based on such information and other, similar sources and on our knowledge of, and expectations about, the markets for our products. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity, and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by independent third parties and by us.
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USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $       million, or approximately $         million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $       per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the initial public offering price per share would increase or decrease our net proceeds, after deducting estimated underwriting discounts and commissions, by $         million (assuming no exercise of the underwriters’ over-allotment option). Each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease our net proceeds by $         million, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to obtain additional capital to fund our research and product development, create a public market for our common stock, facilitate our future access to the public equity markets, increase awareness of our company among potential partners, and improve our competitive position. We intend to use the net proceeds of this offering for development and commercialization of Galleri and DAC, development of additional products, scaling of our technology and laboratory operations, and general corporate purposes.
We currently expect to use the net proceeds from this offering, together with our existing cash, cash equivalents, and marketable securities, as follows:
•approximately $         million to fund our clinical studies through the initial commercialization of Galleri and DAC as LDTs, and to fund ongoing and new clinical studies to validate and demonstrate the utility of our products, and support our reimbursement efforts;
•approximately $         million for current and future product development, including expansion of our laboratory operations to support future growth;
•approximately $          million for preparation for commercial launch and expansion of commercial operations, including the growth of our sales force within the United States; and
•any proceeds not applied to the foregoing for working capital and general corporate purposes.
We may also use a portion of the net proceeds for the acquisition of, or investment in, complementary businesses (including through joint ventures), products, services, technologies, assets, or intellectual property. We periodically evaluate strategic opportunities; however, we have no current commitments to enter into any such acquisitions or make any such investments.
Our expected use of net proceeds from this offering represents our current intentions based upon present plans and business conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering, or the amounts that we will actually spend on the uses set forth above. The amounts and timing of any expenditures will vary depending on numerous factors, including the progress of our ongoing and planned clinical studies, the amount of cash used by our operations, competitive and scientific developments, the rate of growth, if any, of our business, and other factors described in the section titled “Risk Factors.” Accordingly, our management will have significant discretion and flexibility in applying the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds.
Due to the many inherent uncertainties in the development of our product offerings, the amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our research and development, the timing of patient enrollment and evolving regulatory requirements, our ongoing clinical studies and our clinical studies we may commence in the future, the timing of regulatory submissions, any strategic alliances that we may enter into with third parties for our product offerings or strategic opportunities that become available to us, and any unforeseen cash needs.
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Pending the uses described above, we intend to invest the net proceeds from this offering in interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.
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DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently anticipate that we will retain all available funds for use in the operation and expansion of our business. Any future determination to pay dividends on our common stock will be made at the discretion of our board of directors and will depend upon, among other factors, our financial condition, results from operations, current and anticipated cash needs, plans for expansion, and other factors that our board of directors may deem relevant.
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CAPITALIZATION
The following table sets forth our cash, cash equivalents, and marketable securities, and capitalization as of June 30, 2020:
•on an actual basis;
•on a pro forma basis to reflect the following prior to or upon the closing of this offering: (i) the filing and effectiveness of our amended and restated certificate of incorporation; (ii) the conversion of all of our outstanding redeemable convertible preferred stock into common stock; (iii) the conversion of all outstanding Class B common stock into Class A common stock at a ratio of 0.44 shares of Class A common stock to 0.42 shares of Class B common stock; and (iv) the reclassification of our Class A and Class B common stock into a single class of common stock; and
•on a pro forma as adjusted basis to reflect: (i) the pro forma adjustments set forth above; and (ii) the issuance and sale of          shares of common stock by us in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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The pro forma as adjusted information discussed below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. This table should be read in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus.
As of June 30, 2020
ActualPro Forma
Pro Forma as Adjusted(1)
(in thousands, except share and per share data)
Cash, cash equivalents, and marketable securities$685,571 $685,571 
Redeemable convertible preferred stock, $0.001 par value per share, 534,145,027 shares authorized; 534,145,027 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted
$1,994,921 $— 
Stockholders’ (deficit) equity:
Preferred stock, $0.001 par value per share, no shares authorized, issued and outstanding, actual;         shares authorized, pro forma and pro forma as adjusted; no shares issued and outstanding, pro forma and pro forma as adjusted
— — 
Class A common stock, $0.001 par value per share, 868,203,200 shares authorized; 110,862,469 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted
112 — 
Class B common stock, $0.001 par value per share, 30,000,000 shares authorized; 24,989,397 shares issued and outstanding, actual; no shares authorized, issued, and outstanding, pro forma and pro forma as adjusted
34 — 
Common stock, $0.001 par value per share, no shares authorized, issued and outstanding, actual;          shares authorized, pro forma and pro forma as adjusted; 671,186,864 shares issued and outstanding, pro forma;                 shares issued and outstanding pro forma as adjusted
— 681 
Additional paid-in capital116,960 2,111,346 
Accumulated other comprehensive income4,419 4,419 
Accumulated deficit(1,442,047)(1,442,047)
Total stockholders’ (deficit) equity(1,320,522)674,399 
Total capitalization$674,399 $674,399 
__________________
(1)Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of our cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ deficit, and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease, as applicable, the amount of our cash, cash equivalents, and marketable securities, additional paid in-capital, total stockholders’ equity, and total capitalization by $       million, assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters’ over-allotment option to purchase additional shares of our common stock were exercised in full, pro forma as adjusted cash, cash equivalents, and marketable securities, additional paid-in capital, total stockholders’ equity, total capitalization, and shares of common stock outstanding as of June 30, 2020 would be $      million, $      million, $      million, $      million, and       shares, respectively.
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The number of shares of our common stock to be outstanding after this offering is based on 671,186,864 shares of common stock outstanding as of June 30, 2020 and excludes:
• 98,033,707 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2020, at a weighted-average exercise price of $1.62 per share;
• 30,343,670 shares of common stock issuable upon the vesting and settlement of RSUs outstanding as of June 30, 2020;
•9,233,000 shares of common stock issuable upon exercise of stock options granted after June 30, 2020, at a weighted-average exercise price of $2.09 per share;
•                   shares of our common stock to be reserved and available for future issuance under our current 2016 Plan and equity incentive plans that we expect to implement in connection with the Offering, as more fully described in the section titled “Executive Compensation—Executive Compensation Arrangements—Equity Incentive Plans,” including:
• 14,975,649 shares of our common stock reserved for future issuance under our 2016 Plan, as of June 30, 2020;
•any shares of our common stock issuable in connection with the vesting or exercise (as applicable) of outstanding awards under our 2016 Plan;
•                  shares of our common stock that we expect to reserve for future issuance under our 2020 Plan, which we expect will become effective in connection with this offering;
•any shares authorized as automatic annual increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 Plan;
•                  shares of our common stock that we expect to reserve for future issuance under our 2020 ESPP, which we expect will become effective in connection with this offering; and
•any shares authorized as automatic annual increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 ESPP.
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DILUTION
If you purchase shares of 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 in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.
As of June 30, 2020, our historical net tangible book value (deficit) was ($1,321) million, or ($9.72) per share of our common stock, based on 135,851,866 shares of common stock issued and outstanding as of such date. Our historical net tangible book value per share represents tangible assets, less liabilities and redeemable convertible preferred stock, divided by the aggregate number of shares of common stock outstanding as of June 30, 2020.
Our pro forma net tangible book value as of June 30, 2020 was $674.4 million or $1.00 per share of common stock. Pro forma net tangible book value per share represents tangible assets, less liabilities, divided by the aggregate number of shares of common stock outstanding, after giving effect to (i) the conversion of all of our outstanding redeemable convertible preferred stock into common stock; (ii) the conversion of all outstanding Class B common stock into Class A common stock at a ratio of 0.44 shares of Class A common stock to 0.42 shares of Class B common stock; and (iii) the reclassification of our Class A and Class B common stock into a single class of common stock.
After giving further effect to the sale by us of                     shares of common stock in this offering at an assumed initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2020 would have been $          million or $          per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $          per share and an immediate dilution in pro forma net tangible book value to new investors of $          per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the pro forma as adjusted net tangible book value per share immediately after this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share$
Historical net tangible book value (deficit) per share as of June 30, 2020$(9.72)
Increase in historical net tangible book value (deficit) per share as of June 30, 2020 attributable to the pro forma adjustments described above
10.72 
Pro forma net tangible book value per share as of June 30, 20201.00 
Increase in pro forma net tangible book value per share attributable to new investors
Pro forma as adjusted net tangible book value per share after offering
Dilution per share to new investors$
Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $          per share and the dilution in pro forma per share to investors participating in this offering by $          per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $          per share and the dilution in pro forma as adjusted net tangible book value per share to investors participating in this offering by $          per share, assuming the initial public offering price of $          per share remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their over-allotment option to purchase additional shares of our common stock in full, the pro forma as adjusted net tangible book value per share of our common stock after this offering would be $          per share, and the dilution in pro forma net tangible book value per share to investors participating in this offering would be $          per share of common stock.
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The following table sets forth, on a pro forma basis, as of June 30, 2020, the number of shares of common stock purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares PurchasedTotal ConsiderationAverage Price Per Share
NumberPercentAmountPercent
(in thousands, except share and per share data)
Existing stockholders
New investors
Total100 %$                 100 %
Each $1.00 increase or decrease in the assumed initial public offering price per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the total consideration paid by new investors, total consideration paid by all stockholders, and the average price per share paid by all stockholders by approximately $         million, $         million, and $          , respectively, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the total consideration paid by new investors, total consideration paid by all stockholders, and the average price per share paid by all stockholders by approximately $         million, $          million, and $            , respectively, assuming the initial public offering price of $        per share remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The foregoing tables assume no exercise of the underwriters’ over-allotment option or of outstanding stock options after June 30, 2020. If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by our existing stockholders will represent approximately     % of the total number of shares of our common stock outstanding after this offering and the number of shares held by new investors will represent approximately     % of the total number of shares of our common stock outstanding after this offering.
In addition, to the extent any outstanding stock options or other rights are exercised, or we issue additional equity or convertible securities in the future, investors participating in this offering will experience further dilution.
The number of shares of our common stock to be outstanding after this offering is based on 671,186,864 shares of common stock outstanding as of June 30, 2020 and excludes:
• 98,033,707 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2020, at a weighted-average exercise price of $1.62 per share;
• 30,343,670 shares of common stock issuable upon the vesting and settlement of RSUs outstanding as of June 30, 2020;
• 9,233,000 shares of common stock issuable upon exercise of stock options granted after June 30, 2020, at a weighted-average exercise price of $2.09 per share;
•         shares of our common stock to be reserved and available for future issuance under our current 2016 Plan and equity incentive plans that we expect to implement in connection with the Offering, as more fully described in the section titled “Executive Compensation—Executive Compensation Arrangements—Equity Incentive Plans,” including:
• 14,975,649 shares of our common stock reserved for future issuance under our 2016 Plan as of June 30, 2020;
•any shares of our common stock issuable in connection with the vesting or exercise (as applicable) of outstanding awards under our 2016 Plan;
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•               shares of our common stock that we expect to reserve for future issuance under our 2020 Plan, which we expect will become effective in connection with this offering;
•any shares authorized as automatic annual increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 Plan;
•               shares of our common stock that we expect to reserve for future issuance under our 2020 ESPP, which we expect will become effective in connection with this offering; and
•any shares authorized as automatic annual increases in the number of shares of our common stock reserved for future grants pursuant to our 2020 ESPP.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize our selected consolidated financial data for the periods and as of the dates indicated. We have derived our selected consolidated statements of operations data for the years ended December 31, 2018 and 2019 and the consolidated balance sheet data as of December 31, 2018 and 2019 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the consolidated statements of operations data for the six months ended June 30, 2019 and 2020 and the consolidated balance sheet data as of June 30, 2020 from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in our opinion, all adjustments of a normal and recurring nature that are necessary for the fair statement of the financial information set forth in those statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following consolidated financial data together with our audited consolidated financial statements and our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this prospectus and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Year Ended
December 31,		Six Months Ended
June 30,
2018201920192020
(in thousands, except share and per share data)
Consolidated Statements of Operations Data:
Operating expenses:
Research and development(1)
$190,205 $158,886 $83,230 $83,009 
Research and development—related parties(1)
32,955 8,202 4,493 4,190 
Marketing(1)
6,107 7,679 4,080 4,690 
General and administrative(1)
58,229 80,896 31,612 47,304 
Total operating expenses287,496 255,663 123,415 139,193 
Loss from operations287,496 255,663 123,415 139,193
Interest income, net(12,550)(12,430)(6,995)(4,128)
Other expense, net287 1,817 714 1,335 
Loss before provision for (benefit from) income taxes
275,233 245,050 117,134 136,400 
Provision for (Benefit from) income taxes485 (195)66 16
Net loss$275,718 $244,855 $117,200 $136,416 
Net loss attributable to Class A and Class B common stockholders
Basic and diluted$275,718 $244,855 $117,200 $136,416 
Net loss per share attributable to Class A and Class B common stockholders(2)
Basic and diluted$(2.42)$(1.99)$(0.97)$(1.03)
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders(2)
Basic and diluted114,138,912 123,188,351 120,748,150 132,864,532 
Pro forma net loss per share attributable to common stockholders (unaudited)(2)
Basic and diluted$(0.42)$(0.21)
Weighted-average shares of common stock used in computing pro forma net loss per share (unaudited)(2)
Basic and diluted587,035,445 643,637,763 
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___________________
(1)Includes stock-based compensation expense as follows:
Year Ended
December 31,		Six Months Ended
June 30,
2018201920192020
(in thousands)
Research and development$937 $3,913 $1,595 $2,957 
Research and development—related parties778 135 67 30 
Marketing123 202 13 1,230 
General and administrative9,203 24,141 6,004 19,730 
Total stock-based compensation expense$11,041 $28,391 $7,679 $23,947 
(2) See Note 13 to our audited consolidated financial statements and Note 12 to our unaudited condensed consolidated financial statements for further details on the calculation of net loss per share attributable to Class A and Class B common stockholders, basic and diluted, and the weighted-average shares used to compute net loss per share attributable to Class A and Class B common stockholders, basic and diluted, and pro forma information.
As of December 31,As of June 30,
201820192020
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, and marketable securities$641,350 $558,277 $685,571 
Working capital(1)
575,074 512,583 633,653 
Total assets686,845 635,519 756,427 
Total liabilities86,473 84,992 82,028 
Redeemable convertible preferred stock1,603,224 1,763,060 1,994,921 
Accumulated deficit(1,060,776)(1,305,631)(1,442,047)
Total stockholders’ deficit(1,002,852)(1,212,533)(1,320,522)
___________________
(1)We define working capital as current assets less current liabilities. See our audited consolidated financial statements and unaudited condensed consolidated financial statements for further details regarding our current assets and current liabilities.
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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 “Selected Consolidated Financial Data,” audited consolidated financial statements, and unaudited condensed consolidated 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 forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.
Overview
We are a healthcare company focused on saving lives and improving health by pioneering new technologies for early cancer detection. We have built a multi-disciplinary organization of scientists, engineers, and physicians and we are using the power of NGS, population-scale clinical studies, and state-of-the-art computer science and data science to overcome one of medicine’s greatest challenges. Using our platform technology, we have developed a multi-cancer early detection blood test that has demonstrated in clinical studies the ability to detect more than 50 types of cancer, across all stages, and localize the cancer signal with a high degree of accuracy, from a single blood draw. We believe that our multi-cancer early detection test can lead to a dramatic increase in early cancer diagnosis. Based on our own calculations using 2006 to 2015 SEER data and our own performance data, we believe that using our multi-cancer early detection test in conjunction with the five existing recommended screenings in the United States could avert many deaths by earlier detection of up to 75% of cancers with less than a 50% five-year survival rate.
Our multi-cancer early detection test, Galleri, is designed as a screening test for asymptomatic individuals over 50 years of age. We plan to commercially launch Galleri in 2021 as an LDT. In addition to Galleri, we are utilizing our proprietary technology platform and population-scale studies from which Galleri was developed to introduce additional products that address significant unmet medical needs, including DAC. DAC is designed to accelerate diagnostic resolution for patients for whom there is a clinical suspicion of cancer. We plan to commercially launch DAC after Galleri in the second half of 2021 as an LDT. We are also developing an MRD test, designed to enable blood-based detection with or without tissue, and without the need for a personalized assay, as well as other post-diagnostic applications.
Our company was formed within Illumina in 2015. In 2016, we received investments from third parties and began operating as a stand-alone company. Through June 30, 2020, we have raised over $1.9 billion through a combination of leading venture capital and strategic partners. In June 2017, we acquired Hong Kong-based Cirina Limited, founded on the basis of the work of Dr. Dennis Lo, a pioneer in clinical applications of cfNA sequencing, which provided us with a number of patents and exclusive licenses to patents related to the use of cfNA for early detection of cancer.
To date, we have funded our operations primarily from the issuance and sale of our redeemable convertible preferred stock and have not generated any revenues. We do not yet have a commercial product for sale. Since our inception, we have incurred net losses each year. Our net losses were $275.7 million and $244.9 million for the years ended December 31, 2018 and 2019, respectively, and $117.2 million and $136.4 million for the six months ended June 30, 2019 and 2020, respectively. As of June 30, 2020, we had an accumulated deficit of $1.4 billion. Substantially all of our net losses resulted from our research and development programs and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
•attract, hire, and retain qualified personnel;
•scale our technology infrastructure and laboratory operations to prepare for the commercial launch of Galleri and DAC targeted for 2021;
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•continue our research and development activities, including for new products and to enhance existing products; and
•conduct our existing clinical studies and initiate and conduct additional clinical studies to provide the evidence to support our products.
In order to increase our laboratory capabilities to support commercial launch of our products and as we plan to conduct additional research and development activities to support our products, in June 2020, we entered into a lease for approximately 200,000 square feet of laboratory and office space in North Carolina. We expect to commence construction of a laboratory and office space at this location in the third quarter of 2020.
In December 2019, COVID-19 was first reported in Wuhan, China and has since become a global pandemic. The ongoing COVID-19 pandemic has delayed anticipated completion of certain of our clinical studies as we had to suspend enrollment of the studies during the second quarter of 2020. While certain study sites have resumed enrollment, not all of them have, and we may need to suspend enrollment again in the future at sites that have resumed enrollment. The extent to which COVID-19 could impact our future financial condition, liquidity, and results of operations is uncertain.
Components of Results of Operations
Revenue
To date, we have not generated any revenues and do not expect to generate revenues until we commercialize our products, if at all. Our ability to generate revenues will depend heavily on our ability to successfully develop and commercialize our products, which are in development. If we fail to complete the development of our products in a timely manner, our ability to generate future revenues and, as a result, our results of operations and financial position would be materially and adversely affected.
Research and Development and Research and Development—Related Parties
Research and development expenses include costs incurred to develop our technology (prior to establishing technological feasibility), collect clinical samples, and conduct clinical studies to develop and support our products. These costs consist of personnel costs, including salaries, benefits, and stock-based compensation expense associated with our research and development personnel, costs associated with setting up and conducting clinical studies at domestic and international sites, laboratory supplies, consulting costs, depreciation, and allocated overhead including facilities and information technology expenses, which we do not allocate by product. We expense both internal and external research and development costs in the periods in which they are incurred. Research and development—related parties expenses include only those costs incurred with related parties as further discussed in Note 12 to our audited consolidated financial statements and Note 11 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities are deferred and recognized as expense in the period in which the related goods are delivered or services are performed. We expect our research and development expenses to continue to increase in the near term as we continue our research and development activities for new products and to enhance existing products and conduct our existing clinical studies and initiate and conduct additional clinical studies to provide the evidence to support our products. Our research and development expenses will decrease as we complete our clinical studies to support our reimbursement efforts, and may fluctuate based on new product development and the evolving regulatory environment.
Marketing
Marketing expenses consist primarily of personnel costs, including salaries, stock-based compensation expense, and benefits, consulting costs, allocated overhead including facilities and information technology expenses, and travel associated with our commercial organization and product marketing personnel. Also included are costs associated with marketing programs that consist of brand and product awareness activities and trade events and conferences. Our marketing expenses may significantly increase in the foreseeable future as we continue to invest in building brand awareness and additional product marketing and sales functions.
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General and Administrative
General and administrative expenses consist of personnel expenses, including salaries, stock-based compensation expense, and benefits for executive, finance and accounting, legal, human resources, business development, corporate communications, and management information systems personnel. Also included are professional fees, legal costs, including patent and trademark-related expenses, allocated overhead including facilities and information technology expenses, accounting and audit fees, and other corporate expenses. We expect our general and administrative expenses to continue to increase for the foreseeable future as we become a public company and continue to grow our business. We will incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, director and officer insurance premiums, investor relations activities, and other expenses related to administrative and professional services. We also expect to increase our administrative headcount when operating as a public company.
Interest Income, Net
Interest income, net, consists primarily of interest income earned on our cash, cash equivalents, and marketable securities and amortization of premiums and accretion of discounts on our marketable securities.
Other Expense, Net
Other expense, net primarily consists of foreign currency gains and losses as a result of our intercompany agreements and realized gains or losses on marketable securities.
Provision for (Benefit from) Income Taxes
Provision for income taxes consists of income tax expense in a foreign jurisdiction. As of December 31, 2019, we had federal and state NOL carryforwards of $202.5 million and $279.4 million, respectively, and federal and state research and development credit carryforwards of $22.2 million and $18.2 million, respectively. Certain of these NOL and research and development credit carryforwards will begin to expire, if not utilized, in various years beginning in 2036. We have established full valuation allowances against our NOLs and research and development credits due to the uncertainty surrounding the realization of these assets.
Results of Operations
The following table sets forth our results of operations:
Year Ended
December 31,		Six Months Ended
June 30,
2018201920192020
(in thousands)
Operating expenses:
Research and development$190,205 $158,886 $83,230 $83,009 
Research and development—related parties32,955 8,202 4,493 4,190 
Marketing6,107 7,679 4,080 4,690 
General and administrative58,229 80,896 31,612 47,304 
Total operating expenses287,496 255,663 123,415 139,193 
Loss from operations287,496 255,663 123,415 139,193 
Interest income, net(12,550)(12,430)(6,995)(4,128)
Other expense, net287 1,817 714 1,335 
Loss before provision for (benefit from) income taxes
275,233 245,050 117,134 136,400 
Provision for (Benefit from) income taxes485 (195)66 16 
Net loss$275,718 $244,855 $117,200 $136,416 
81
Comparison of the Six Months Ended June 30, 2019 and 2020
The following table sets forth our results of operations:
Six Months Ended June 30,Change
2019