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 are deploying 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 the liquid biopsy space, where we are leveraging our core expertise
to develop products for oncology diagnostic applications, and are also working
to develop a transplant rejection test. 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
Since 2009, we have launched a comprehensive suite of thirteen products in
reproductive health and prenatal testing - 13 molecular diagnostic tests and a
newborn stem cell banking offering to complement our prenatal testing portfolio
- as well as our offerings in oncology and transplant rejection, and our
Constellation cloud-based platform. We generate a majority of our revenues from
the sale of Panorama, our non-invasive prenatal test, "NIPT," which we
commercially launched in
We were formed in 2003 under our former name, Gene Security Network. From 2006
through 2013, the
In the quarter ended
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subscriber, or a dependent of a subscriber, who is insured under an insurance
policy with the insurance carrier identified. The number of covered lives
represented by insurers that have positive coverage determinations or with which
we or our laboratory distribution partners have a contract provides a measure of
our access to the healthcare market. Although our target market for NIPT is a
much smaller subset of the total number of covered lives because it excludes
subscribers for whom our NIPT would not be performed, such as men, children and
post-menopausal women, we believe the number of
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 three months
ended
Prior to 2016, we experienced rapid growth in 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 three
months ended
In
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kidney transplants, launched an early access program to enroll top transplant centers in Q4 2019, and are working towards a full-scale commercial launch of Prospera in 2020.
For the three months ended
Our net losses for the three months ended
COVID-19 Pandemic
Prior to the spread of COVID-19, we experienced firm growth trends consistent with those experienced in the fourth quarter of 2019 and early in the first quarter 2020.
The spread of COVID-19 has caused us to modify our business practices (including employee travel, mandating that all non-essential personnel work from home, temporary closures of our offices, and cancellation of physical participation in sales activities, meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. Such actions could also impact our ability to fully integrate businesses we may acquire in the future. There is no certainty that such actions will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities. If significant portions of our workforce, and particularly our laboratory staff, are unable to work effectively, including due to illness, quarantines, social distancing, government actions or other restrictions in connection with the COVID-19 pandemic, our operations will be impacted.
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 as a result of its global economic impact, including any recession that has occurred or may occur in the future.
Specifically, difficult macroeconomic conditions, such as decreases in per
capita income and level of disposable income, increased and prolonged
unemployment or a decline in consumer confidence as a result of the COVID-19
pandemic, 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, which many consumers
may view as discretionary. Decreased demand for our tests, particularly in
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Our test volumes began to decrease in the second half of
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.
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.
Starting in the fourth quarter of 2015, we began recognizing 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.
Sales of Panorama, HCS, Vistara, Anora, PGS and PGD tests are recorded as
product revenues. Revenues recognized from tests processed through our
Constellation software platform, Signatera revenues, and revenue recognized from
the Qiagen, BGI Genomics, and Foundation Medicine agreements (collectively the
"Strategic Partnership Agreements"), and Signatera (RUO) are reported in
licensing and other revenues. 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 is also impacted by having increased our in 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 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.
Research and Development
Research and development expenses include costs incurred to develop our technology, collect clinical samples and conduct clinical studies to develop and support our products. These costs consist of personnel costs, including stock-based compensation expense, prototype materials, laboratory supplies, consulting costs, regulatory costs, electronic medical records set up costs, costs associated with setting up and conducting clinical studies at domestic and international sites and allocated overhead, including rent, information technology, equipment depreciation and utilities. We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses to increase in absolute dollars as we continue to invest in research and development activities related to developing enhanced and new products.
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Selling, General and Administrative
Selling, general and administrative expenses include executive, selling and marketing, legal, finance and accounting, human resources, billing and client services. These expenses consist of personnel costs, including stock-based compensation expense, direct marketing expenses, audit and legal expenses, consulting costs, training and medical education activities, payer outreach programs and allocated overhead, including rent, information technology, equipment depreciation, and utilities.
Interest Expense
Interest expense is attributable to borrowing under our Credit Line and 2017 Term Loan, as well as the amortization of debt discount associated with the 2017 Term Loan.
Interest and Other Income, Net
Interest and other income is from interest earned on our cash, realized gains and losses on investments, foreign currency remeasurement gains and losses, and finance charges related to the unused borrowing capacity of our 2017 Term Loan.
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
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, 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. 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.
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A performance obligation represents a promise in a contract to transfer a distinct good or service to a customer, which represents a unit of accounting in accordance with ASC 606. A portion of the consideration should be allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We evaluate our contracts with insurance carriers, laboratory partners and patients and identify a single performance obligation in those contracts, which is the delivery of the test results.
The total consideration which we expect to collect in exchange for our products is an estimate and may be fixed or variable. Consideration includes reimbursement from both patients and insurance carriers, adjusted for variable consideration related to disallowed cases, discounts, refunds and doubtful accounts, and is estimated using the expected value approach. For insurance carriers with similar reimbursement characteristics, we use the portfolio of relevant historical data to estimate variable consideration and total collections for our products. We constrain the estimated variable consideration when we assess it is probable that a significant reversal in the amount of cumulative revenue recognized may occur in future periods. The consideration expected from laboratory partners usually includes a fixed amount, but it can be variable depending on the volume of tests performed, and we determine the variable consideration using the expected value approach. For insurance carriers, laboratory partners and patients, we allocate the total consideration to a single performance obligation, which is the delivery of the test results to the customers.
When assessing the total consideration for insurance carriers and patients, a certain percentage of revenues is further constrained for estimated refunds.
We generally bill an insurance carrier, a laboratory partner or a patient upon delivery of test results. We also bill patients directly for out-of-pocket costs involving co-pays and deductibles that they are responsible for. Tests billed to insurance carriers and directly to patients usually take an average of nine to twelve months to collect the payments, and for tests billed to laboratory distribution partners, the average collection cycle takes approximately two to three months. At times, we may or may not get reimbursed for the full amount billed. Further, we may not get reimbursed at all for tests performed if such tests are not covered under the insurance carrier's reimbursement policies or we are not a qualified provider to the insurance carrier, or if the tests were not previously authorized.
Product revenue is recognized in an amount that equals the total consideration
(as described above) at a point in time when the test results are delivered. We
reserve certain amounts in other accrued liabilities on the balance sheet in
anticipation of requests for refunds of payments previously made by insurance
carriers, which are accounted for as reductions in product revenues in the
statement of operations and comprehensive loss. During the three months ended
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. In addition, we recognize revenues from IVD kits.
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Comparison of the three months ended
Three months ended March 31, Change 2020 2019 Amount Percent (In thousands except percentage) Revenues Product revenues$ 87,046 $ 63,364 $ 23,682 37.4 % Licensing and other revenues 6,966 3,460 3,506 101.3 Total revenues 94,012 66,824 27,188 40.7 Cost and expenses Cost of product revenues 41,520 41,605 (85) (0.2)
Cost of licensing and other revenues 3,458 1,698 1,760 103.7 Research and development
18,225 11,435 6,790 59.4
Selling, general and administrative 65,681 43,832 21,849 49.8 Total cost and expenses
128,884 98,570 30,314 30.8 Loss from operations (34,872) (31,746) (3,126) 9.8 Interest expense (2,464) (2,724) 260 (9.5) Interest and other income, net 1,987 453 1,534 338.6 Loss before income taxes (35,349) (34,017) (1,332) 3.9 Income tax expense (23) (74) 51 (68.9) Net loss$ (35,372) $ (34,091) $ (1,281) 3.8 % 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
In addition, our ability to market and sell our tests outside of
Product Revenues
During the three months ended
Licensing and Other Revenues
Licensing and other revenues increased by
44 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
Interest Expense
Interest expense decreased by
Interest and Other Income
Interest and other income was
Liquidity and Capital Resources
We have incurred net losses each year since our inception. For the three months
ended
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As of
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
In
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
2017 Term Loan
In
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date. Our obligations under the 2017 Term Loan are secured by substantially all of our assets, including our intellectual property, subject to certain customary exceptions.
On
In
Cash Flows
The following table summarizes our condensed consolidated cash flows for the periods indicated: Three Months EndedMarch 31, 2020 2019
(Amounts in thousands)
Cash (used in) provided by operating activities
43,492 12,917 Cash provided by financing activities 3,826 2,578
Net (decrease) increase in cash, cash equivalents and restricted cash
12,218 (16,324)
Cash, cash equivalents and restricted cash, beginning of period
61,981 51,004
Cash, cash equivalents and restricted cash, end of period
$ 74,199 $ 34,680
Cash Used in Operating Activities
Cash used in operating activities during the three months ended
Cash used in operating activities during the three months ended
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prepaid expenses and other current assets. Operating liabilities generated cash
outflows of
Cash Used in Investing Activities
Cash provided by investing activities for the three months ended
Cash used in investing activities for the three months ended
Cash Provided by Financing Activities
Cash provided by financing activities for the three months ended
Contractual Obligations and Other Commitments
See Note 8 - Commitments and Contingencies for details.
Off-Balance Sheet Arrangements
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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