You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.
Overview
We are a growing diagnostics company with proprietary molecular and
bioinformatics technology that we deploy to change the management of genetic
disease worldwide. Our goal is to develop and commercialize non- or
minimally-invasive tests to evaluate risk for a wide range of genetic
conditions, such as Down syndrome, the results of which can enable early
detection, diagnosis and treatment. Our technology has been proven clinically
and commercially in the prenatal testing space. We have begun translating this
success into other areas, and we are leveraging our core expertise to develop
products for oncology diagnostic applications as well as transplant rejection
and organ health. We seek to enable even wider adoption of our technology
through our global cloud-based distribution model. In addition to our direct
sales force in
We offer a comprehensive suite of thirteen products in reproductive health and prenatal testing - thirteen molecular diagnostic tests and a newborn stem cell banking offering to complement our prenatal testing portfolio - as well as our offerings in oncology and organ health, and our Constellation cloud-based platform. We generate a majority of our revenues from the sale of Panorama, our non-invasive prenatal test, "NIPT," as well as our Horizon Carrier Screening ("HCS") tests. Commercialization of our products consisted of Spectrum Preimplantation Genetic Screening in 2009 and Spectrum Preimplantation Genetic Diagnosis in 2010; Anora Products of Conception ("POC") in 2010; our non-invasive prenatal paternity test in 2011; Horizon Carrier Screening in 2012; Panorama NIPT in 2013; our microdeletions panel for Panorama in 2014; Constellation in 2015; Vistara, Signatera (RUO) and Panorama for twin pregnancies in 2017; and full-scale commercial launches of the CLIA version of Signatera and of Prospera in 2020.
In the quarter ended
The principal focus of our commercial operations currently is to distribute
molecular diagnostic tests through both our direct sales force and laboratory
distribution partners, and our Constellation licensees under our cloud-based
distribution model. The number of tests that we accession is a key indicator
that we use to assess our business. A test is accessioned when we receive the
test at our laboratory, the relevant information about the test is entered into
our computer system and the test sample is routed into the appropriate sample
flow. This number is a subset of the number of tests that we process, which
includes tests distributed through our Constellation licensees. The number of
tests that we process is a key metric as it tracks overall volume growth,
particularly as our laboratory partners may transition from sending samples to
our laboratory to our cloud-based distribution model. During the six months
ended
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The percent of our revenues attributable to our
In addition to distributing molecular diagnostic tests to be performed at our laboratory, either directly or through our laboratory distribution partners, we also establish licensing arrangements with laboratories under our cloud-based distribution model, whereby our laboratory licensees run the molecular workflows themselves and then access our bioinformatics algorithms through our cloud-based Constellation software. This cloud-based distribution model results in lower revenues and gross profit per test than in cases where we process a test ourselves; however, because we don't incur the costs of processing the tests, our costs per test under this model are also lower. We began entering into these licensing arrangements starting in the fourth quarter of 2015.
For the six months ended
Our net loss for the six months ended
COVID-19 Impact
The COVID-19 pandemic continues to present a global public health and economic
challenge and is affecting our business operations and the
The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or address its impact, and how quickly and to what extent normal economic and operating activities can resume. The COVID-19 pandemic could limit the ability of our customers, suppliers and business partners to perform under their contracts with us, including third-party payers' ability to make timely payments to us during and following the pandemic. We may also experience a shortage of laboratory supplies and reagents or a suspension of services from other laboratories or third parties. We have also become increasingly dependent on growing and maintaining a network of mobile phlebotomy specialists who can provide testing capabilities, as many consumers are unable to visit clinics, hospitals or other testing facilities as a result of the COVID-19 pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse impact to our business because of its global economic impact, including any recession that has occurred or may occur in the future.
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Specifically, difficult macroeconomic conditions as a result of COVID-19, such
as decreases in per capita income and level of disposable income, increased and
prolonged unemployment, a decline in consumer confidence, as well as limited or
significantly reduced points of access of our products, could have a material
adverse effect on the demand for some of our products, such as our products
targeted for the IVF market. Decreased demand for our tests, particularly in
Our test volumes in the second quarter of 2020 remained relatively flat from the
previous quarter, however, test volumes may by adversely impacted by the
COVID-19 pandemic. The average selling price of our genetic tests in second
quarter of 2020 decreased slightly compared to the prior quarter which resulted
in a negative impact to the results of operations. We cannot predict volatility
of the volumes and selling process of our genetic tests. While it is too early
to predict the full impact COVID-19 will have on our business, we expect it to
potentially have an adverse impact on our financial results for at least the
next quarter and potentially the full year, depending upon the timing of any
lifting of COVID-19 limitations on the
Components of the Results of Operations
Revenues
We generate revenues from the sale of our genetic tests, primarily from the sale of our Panorama and HCS tests. Our two primary distribution channels are our direct sales force and our laboratory partners. In cases where we promote our tests through our direct sales force, we generally bill directly to a patient, clinic or insurance carrier, or a combination of the insurance carrier and patient for the fees.
Sales of Panorama, HCS, Vistara, Anora, PGS, PGD, Signatera CLIA, and Prospera tests are recorded as product revenues. Revenues recognized from tests processed through our Constellation software platform, and revenue recognized from the Qiagen, BGI Genomics, and Foundation Medicine agreements (collectively the "Strategic Partnership Agreements"), and Signatera research use only ("RUO") offering are reported in licensing and other revenues.
In cases where we sell our tests through our laboratory partners, the majority
of our laboratory partners bill the patient, clinic or insurance carrier for the
performance of our tests, and we are entitled to either a fixed price per test
or a percentage of their collections. We also recognize licensing revenues
through the licensing and the provisioning of services to support the use of our
proprietary technology by licensees under our cloud-based distribution model. As
of
Our ability to increase our revenues will depend on our ability to further
penetrate the domestic and international markets and, in particular, generate
sales through our direct sales force, develop and commercialize additional
tests, obtain reimbursement from additional third-party payers and increase our
reimbursement rate for tests performed. In particular, our financial performance
depends on reimbursement for Panorama in the average risk population and for
microdeletions. The use of Panorama in the average risk population is not yet
broadly reimbursed, although many third-party payers have begun to reimburse for
this. Many third-party payers do not currently reimburse for microdeletions
screening, as further discussed in the risk factor entitled "Reimbursement and
Regulatory Risks Related to Our Business- If we are unable to expand or maintain
third-party payer coverage and reimbursement for Panorama and our other tests,
or if we are required to refund any reimbursements already received, our
revenues and results of operations would be adversely affected," in part because
there is currently limited published data on the performance of microdeletions
screening tests. A new current procedure terminology ("CPT") code for
microdeletions went into effect beginning
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Our financial performance has also been impacted by our larger in-network coverage with third-party payers, which we believe is crucial to our growth and long-term success. However, because the negotiated fees under our contracts with third-party payers are typically lower than the list price of our tests, as we enter into additional in-network contracts with insurance providers, our average reimbursement per test may decrease as compared to out-of-network contracts. While we expect the reduction in average reimbursement per test from in-network pricing to reduce our revenues and gross margins in the near term, in-network pricing is more predictable than out-of-network pricing, and we intend to continue to mitigate the impact by driving more business from our most profitable accounts. In addition, our strategy to offer our tests to laboratory licensees via our Constellation cloud-based software platform may also cause our revenues to decrease because we do not process the tests and perform the molecular biology analysis in our own laboratory under this model, and therefore are not able to charge as high an amount, and as a result realize lower revenues per test than when we perform the entire test ourselves. However, cost of licensing and other revenues for the Constellation software platform are relatively low, and therefore, its associated gross margin is higher.
Cost of Product Revenues
The components of our cost of product revenues are material and service costs, impairment charges associated with testing equipment, personnel costs, including stock-based compensation expense, equipment and infrastructure expenses associated with testing samples, electronic medical records, order and delivery systems, shipping charges to transport samples, costs incurred from outsourcing our tests to third parties, and allocated overhead such as rent, information technology costs, equipment depreciation and utilities. Costs associated with performing tests are recorded when the test is accessioned. We expect cost of product revenues in absolute dollars to increase as the number of tests we perform increases.
However, having rapidly achieved scale, we have increased our focus on more efficient use of labor, automation, and DNA sequencing. For example, we updated the molecular and bioinformatics process for Panorama to further reduce the sequencing reagents, test steps and associated labor costs required to obtain a test result, while increasing the accuracy of the test to allow it to run with lower fetal fraction input. These improvements also reduced the frequency of the need to require blood redraws from the patient.
Cost of Licensing and Other Revenues
The components of our cost of licensing and other revenues are material costs associated with test kits sold to Constellation clients, development and support services relating to our Strategic Partnership Agreements, and costs associated with specimens and Whole Exome Sequencing ("WES") from both in-house and by third party providers, as well as labor costs, relating to our Signatera (RUO) offering.
We currently have 15 revenue generating licensing and service agreements with laboratories and continue to have active discussions with many other potential licensees under our Constellation distribution model. We consider our cost of licensing and other revenues for the Constellation software platform to be relatively low, and therefore we expect its associated gross margin is higher. We expect our cost of licensing will increase in relation to volume growth.
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with generally accepted accounting principles in
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historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider our critical accounting policies and estimates to be revenue recognition, leases, inventory, fair value measurements including the valuation of 2.25% Convertible Senior Notes due 2027 (the "Convertible Notes"), and stock-based compensation.
Recent Accounting Pronouncements
There are no recent accounting pronouncements that have a material impact to our condensed consolidated financial statements. See Note 2, Summary of Significant Accounting Policies, of Item 1, Financial Statement, for recently adopted accounting pronouncements.
Revenue Recognition
We recognize revenues when, or as, performance obligations in the contracts are satisfied, in the amount reflecting the expected consideration to be received from the goods or services transferred to the customers.
Product Revenues
Product revenues are derived from contracts with insurance carriers, laboratory partners and patients in connection with sales of prenatal genetic tests. The majority of our revenues are derived from Panorama NIPT, HCS, and to a lesser extent, other genetic tests including Signatera CLIA and Prospera. We enter into contracts with insurance carriers with primarily payment terms related to tests provided to the patients who have health insurance coverage. Insurance carriers are considered to be third-party payers on behalf of the patients, and the patients are considered as the customers who receive genetic test services. Tests may be billed to insurance carriers, patients, or a combination of insurance carriers and patients. Further, we sell tests to a number of domestic and international laboratory partners and identify the laboratory partners as customers provided that there is a test services agreement between us and them.
Licensing and Other Revenues
We recognize licensing revenues from our Constellation cloud-based distribution model, pursuant to which we grant licenses to laboratories to access our proprietary bioinformatics algorithms through our cloud-based software to analyze the results of molecular workflows that such licensees perform in their laboratories. In addition, the royalties we receive from our arrangement with a prenatal paternity licensee are recognized Constellation revenues.
We also recognize revenues from our Signatera (RUO) offering, which is for research use only to cancer researchers and biopharmaceutical companies. We enter into agreements with pharmaceutical companies to utilize our Signatera tests typically to study new cancer treatments or to validate the outcomes of clinical trials for which the pharmaceutical companies are identified as customers.
We also recognize revenues from our Strategic Partnership Agreements. The performance obligations are unique in each agreement and would typically require the license of intellectual property, development services, support services, and future test work. We also record revenues from the sale of IVD kits in licensing and other revenues.
41 Table of Contents Results of Operations
Comparison of the three months ended
Three Months Ended June 30, Change 2020 2019 Amount Percent (in thousands except percentages) Revenues Product revenues$ 80,414 $ 65,099 $ 15,315 23.5 % Licensing and other revenues 6,058 9,256 (3,198) (34.6) Total revenues 86,472 74,355 12,117 16.3 Cost and expenses Cost of product revenues 42,731 41,382 1,349 3.3
Cost of licensing and other revenues 4,208 2,443 1,765 72.2 Research and development
23,005 12,124 10,881 89.7
Selling, general and administrative 68,188 47,042 21,146 45.0 Total cost and expenses
138,132 102,991 35,141 34.1 Loss from operations (51,660) (28,636) (23,024) 80.4 Interest expense (4,038) (2,721) (1,317) 48.4 Interest and other income, net 1,924 836 1,088 130.1 Loss on debt extinguishment (5,848) - (5,848) 100.0 Loss before income taxes (59,622) (30,521) (29,101) 95.3 Income tax expense (15) (1,895) 1,880 (99.2) Net loss$ (59,637) $ (32,416) $ (27,221) 84.0 % Revenues
Total revenues are comprised of product revenues, which are primarily driven by
sales of our Panorama and HCS tests, and licensing and other revenues, which
primarily includes development licensing revenue, licensing of our Constellation
software to our licensees, and revenues from our Signatera (RUO) offering. Total
revenues increased by
We derive our revenues from tests based on units reported to customers-tests
delivered with a result. All reported units are either accessioned in our
laboratory or processed outside of our laboratory. As noted in "Overview," the
number of tests that we process is a key metric as it tracks overall volume
growth. During the three months ended
Product Revenues
During the three months ended
Licensing and Other Revenues
Licensing and other revenues decreased by
42 Table of Contents Cost of Product Revenues
During the three months ended
Cost of Licensing and Other Revenues
Cost of licensing and other revenues for the three months ended
Research and Development
Research and development expenses during the three months ended
Selling, General and Administrative
Selling, general and administrative expenses increased by
Loss on Debt Extinguishment
The loss on debt extinguishment of
Interest Expense
Interest expense increased by
43 Table of Contents Interest and Other Income
Interest and other income for the three months ended
Comparison of the six months ended
Six months ended June 30, Change 2020 2019 Amount Percent (in thousands except percentages) Revenues Product revenues$ 167,460 $ 128,463 $ 38,997 30.4 % Licensing and other revenues 13,024 12,716 308 2.4 Total revenues 180,484 141,179 39,305 27.8 Cost and expenses Cost of product revenues 84,251 82,987 1,264 1.5
Cost of licensing and other revenues 7,666 4,141 3,525 85.1 Research and development
41,230 23,559 17,671 75.0
Selling, general and administrative 133,869 90,874 42,995 47.3 Total cost and expenses
267,016 201,561 65,455 32.5 Loss from operations (86,532) (60,382) (26,150) 43.3 Interest expense (6,502) (5,445) (1,057) 19.4 Interest and other income, net 3,911 1,289 2,622 203.4 Loss on debt extinguishment (5,848) - (5,848) 100.0 Loss before income taxes (94,971) (64,538) (30,433) 47.2 Income tax expense (38) (1,969) 1,931 (98.1) Net loss$ (95,009) $ (66,507) $ (28,502) 42.9 % Revenues
Total revenues are comprised of product revenues, which are primarily driven by
sales of our Panorama and HCS tests, and licensing and other revenues, which
primarily includes development licensing revenue, licensing of our Constellation
software to our licensees and revenues from our Signatera (RUO) offering. Total
revenues increased by
We derive our revenues from tests based on units reported to customers-tests
delivered with a result. All reported units are either accessioned in our
laboratory or processed outside of our laboratory. As noted in "Overview," the
number of tests that we process is a key metric as it tracks overall volume
growth. During the six months ended
Product Revenues
During the six months ended
Licensing and Other Revenues
Licensing and other revenues increased by
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product offering. This was partially offset by a decrease of
Cost of Product Revenues
During the six months ended
Cost of Licensing and Other Revenues
Cost of licensing and other revenues for the six months ended
Research and Development
Research and development expenses during the six months ended
Selling, General and Administrative
Selling, general and administrative expenses increased by
Loss on Debt Extinguishment
The loss on debt extinguishment of
Interest Expense
Interest expense increased by
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outstanding principal balance of
Interest and Other Income
Interest and other income increased by
Liquidity and Capital Resources
We have incurred net losses each year since our inception. For the six months
ended
While we have introduced multiple products that are generating revenues, these revenues have not been sufficient to fund all operations. Accordingly, we have funded the portion of operating costs that exceeds revenues through a combination of equity issuances and debt and other financings. We expect to develop and commercialize future products and, consequently, we will need to generate additional revenues to achieve future profitability and may need to raise additional equity or incur additional debt. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders and requires significant debt service payments, which diverts resources from other activities. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain additional financing, we may be required to delay the development and commercialization of our products and significantly scale back our business and operations.
In
Based on our current business plan, we believe that our existing cash and
marketable securities will be sufficient to meet our anticipated cash
requirements for at least 12 months after
Credit Line Agreement
In
46 Table of Contents 2017 Term Loan
In
Convertible Notes
In
The Convertible Notes are senior, unsecured obligations of we and bear interest
at a rate of 2.25% per year, payable in cash semi-annually in arrears in May and
November of each year, beginning in
We received net proceeds from the Convertible Notes of
Cash Flows
The following table summarizes our condensed consolidated cash flows for the periods indicated: Six Months Ended June 30, 2020 2019 (in thousands) Cash used in operating activities$ (76,080) $ (35,751) Cash used in investing activities (121,954) (100,995) Cash provided by financing activities 213,430 115,725 Net (decrease) increase in cash, cash equivalents and restricted cash 15,396 (21,021) Cash, cash equivalents and restricted cash, beginning of period 61,981 51,004
Cash, cash equivalents and restricted cash, end of period
$ 77,377 $ 29,983
Cash Used in Operating Activities
Cash used in operating activities during the six months ended
47 Table of Contents
for credit losses and a
Cash used in operating activities during the six months ended
Cash Used in Investing Activities
Cash used in investing activities for the six months ended
Cash used in investing activities for the six months ended
Cash Provided by Financing Activities
Cash provided by financing activities for the six months ended
Cash provided by financing activities for the six months ended
Contractual Obligations and Other Commitments
See Note 8 - Commitments and Contingencies for details.
Off-Balance Sheet Arrangements
Other than our obligation to settle the conversion option under the Convertible Notes described in Note 10, Debt, in Item 1, Financial Statements, we do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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