As confidentially submitted with the Securities and Exchange Commission on October 6, 2021 as Amendment No. 1 to the initial confidential submission.

This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.

Registration No. 333-                

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Agendia N.V.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

The Netherlands		8071		Not Applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

22 Morgan

Irvine, California 92618

(888) 321-2732

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

 

 

Agendia Inc.

22 Morgan

Irvine, CA 92618

+1 (888) 321-2732

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

Copies of all communications, including communications sent to agent for service, should be sent to:

 

B. Shayne Kennedy Michael E. Sullivan Latham & Watkins LLP 650 Town Center Drive, 20th Floor Costa Mesa, CA 92626 +1 714 540 1235		Andrew D. Hoffman Lillian S. Jenks Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Rd Palo Alto, CA 94304 +1 650 493 9300

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

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

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

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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
Ordinary shares, nominal value €0.08 per share		$		$

 

(1)	Estimated solely for purpose of calculating the amount of registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.

(2)	Includes the aggregate offering price of additional ordinary shares that the underwriters have the option to purchase, if any.

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 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 is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                      , 2021

PRELIMINARY PROSPECTUS

 

 

             Shares

Agendia N.V.

Ordinary Shares

$                 per share

 

 

This is the initial public offering of our ordinary shares. We are selling                 of our ordinary shares in this offering. We currently expect the initial public offering price to be between $                 and $                 per share.

We have granted the underwriters an option to purchase up to                 additional ordinary shares. We intend to apply to list our ordinary shares on The Nasdaq Global Market under the symbol “AGDX.”

 

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 16.

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be eligible for reduced public company disclosure requirements. See “Summary—Implications of Being an Emerging Growth Company and a Foreign Private Issuer.”

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

 

 

 

		Per Share				Total
Initial Public Offering Price		$				$
Underwriting Discount(1)		$				$
Proceeds to Agendia N.V. (before expenses)		$				$

 

 

(1)	We refer you to “Underwriting” beginning on page 245 for additional information regarding underwriting compensation.

The underwriters expect to deliver the shares to purchasers on or about                 , 2021 through the book entry facilities of The Depository Trust Company.

 

Goldman Sachs & Co. LLC		Citigroup		Cowen		Stifel

 

 

                    , 2021

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY			1
THE OFFERING			12
SUMMARY FINANCIAL DATA			14
RISK FACTORS			16
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			91
MARKET AND INDUSTRY DATA			93
USE OF PROCEEDS			94
DIVIDEND POLICY			95
CAPITALIZATION			96
DILUTION			98
SELECTED CONSOLIDATED FINANCIAL DATA			101
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			104
BUSINESS			125
MANAGEMENT			181
EXECUTIVE COMPENSATION			190
PRINCIPAL SHAREHOLDERS			203
RELATED PARTY TRANSACTIONS			206
DESCRIPTION OF SHARE CAPITAL AND ARTICLES OF ASSOCIATION			211
BOOK ENTRY PROCEDURE AND SETTLEMENT			231
SHARES ELIGIBLE FOR FUTURE SALE			233
MATERIAL TAX CONSIDERATIONS			235
UNDERWRITING			245
EXPENSES OF THE OFFERING			255
LEGAL MATTERS			256
EXPERTS			257
ENFORCEMENT OF CIVIL LIABILITIES			258
WHERE YOU CAN FIND MORE INFORMATION			260
INDEX TO FINANCIAL STATEMENTS			F-1

We have not, 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 prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the ordinary shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our ordinary shares. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2021 (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.

For investors outside the United States: Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who have come into possession of this prospectus in a jurisdiction outside the United States are required to inform

 

i

themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

We are incorporated in the Netherlands, and a majority of our outstanding securities are owned by non-U.S. residents. Under the rules of the U.S. Securities and Exchange Commission, or SEC, we are currently eligible for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

PRESENTATION OF FINANCIAL INFORMATION

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them. All references in this prospectus to “$,” “US$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “€” and “euros,” mean euros, unless otherwise noted. Certain euro amounts contained in this offering circular have been translated into U.S. dollars. Unless otherwise indicated, the exchange rate used to translate such amounts was €1.00 to US$1.1891, the official exchange rate quoted as of June 30, 2021 by the European Central Bank. The U.S. dollar equivalent information presented in this prospectus is provided solely for the convenience of investors and should not be construed as implying that the euro amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate.

 

ii

 

1

 

2

 

3

 

4

 

5

 

6

 

7

 

8

 

9

 

10

 

11

 

12

 

13

 

14

 

15

RISK FACTORS

You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment in our ordinary shares. Our business, financial condition or results of operations could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our ordinary shares could decline and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors.

Risks Related to our Financial Condition

We have incurred net losses since our inception and we anticipate that we will continue to incur losses for the foreseeable future, which could harm our future business prospects and make it difficult for us to achieve or sustain profitability.

We have incurred losses since we were formed. From our date of inception on July 10, 2003 through June 30, 2021, we have accumulated a total deficit of approximately $309.8 million. We expect to continue investing significantly toward development and commercialization of our combined MammaPrint and BluePrint platform. If our revenue does not grow significantly, we will not be profitable. Additionally, our revenue may not continue to grow at historical rates or at all, and we may not be able to achieve or sustain profitability. We cannot be certain that the revenue from the sale of any products or services based on our technologies will be sufficient to make us profitable.

Our inability to raise additional capital on acceptable terms, or at all, in the future may limit our ability to develop and commercialize new products and expand our operations.

We may require additional capital to fully fund our current strategic plan, which includes successfully commercializing our MammaPrint and BluePrint products and solutions that address unmet clinical needs facing breast cancer patients, and developing a pipeline of future products and services. Additional financing may not be available in amounts or on terms satisfactory to us or at all. Our success in raising additional capital may be significantly affected by general market conditions, the market price of our ordinary shares, our financial condition, uncertainty about the future commercial success of our current products and services, the development and commercial success of future products or services, regulatory developments, the status and scope of our intellectual property, any ongoing litigation, our compliance with applicable laws and regulations and several other factors. If we raise additional funds through the sale of equity, convertible debt or other equity-linked securities, our shareholders’ ownership will be diluted and the market price of our ordinary shares could be depressed. We may issue securities that have rights, preferences and privileges senior to our ordinary shares. Additionally, if we raise additional funds through collaborations, licensing arrangements or other structured financing transactions, we may relinquish rights to our technologies or products or services, grant security interests in our assets or grant licenses to third parties on terms that are unfavorable to us.

Our operating results could be subject to significant fluctuation, which could increase the volatility of our share price and cause losses to our shareholders.

Our revenue and results of operations may fluctuate significantly, depending on a variety of factors, including the following:

 

•

our success in marketing and selling, and changes in demand for, our MammaPrint and BluePrint tests, as well as kits used in decentralized labs to perform tests, and the level of reimbursement and collection obtained for such tests;

 

16

•

the mix of varying reimbursement levels of government and commercial payors reimbursing our tests on behalf of patients;

 

•

our success in collecting payments from third-party payors, patients and collaborative partners, variation in the timing of these payments and recognition of these payments as revenue;

 

•

the pricing of our tests, including potential changes in Medicare or other third-party payor reimbursement rates, including the potential impacts of the Protecting Access to Medicare Act of 2014, or PAMA;

 

•

circumstances affecting our ability to provide our tests and kits, including weather events, supply shortages and regulatory or other circumstances that adversely affect our ability to process tests in our clinical laboratories;

 

•

seasonal variations affecting healthcare provider recommendations for our products, patient compliance with healthcare provider recommendations, including holidays, weather events and circumstances such as the outbreak of influenza that may limit patient access to medical practices for tests and preventive services, as well as orders from distributors;

 

•

the impact of the COVID-19 pandemic on our business and operations;

 

•

fluctuations in the amount and timing of our selling and marketing costs and our ability to manage costs and expenses and effectively implement our business; and

 

•

our research and development activities, including the timing of costly clinical trials.

The COVID-19 pandemic has and may continue to have a material adverse effect on our business and financial results.

The COVID-19 outbreak, which the World Health Organization has classified as a pandemic, together with related precautionary measures, has materially disrupted our business and may continue to disrupt our business for an unknown period of time. For example, during the course of the pandemic there have been closures of mammography labs, which has materially impacted our testing volumes and revenue and there have also been delays in the 510(k) regulatory clearance process. The territories in which we market, sell, distribute and perform our tests are attempting to address the COVID-19 pandemic in varying ways, including stay-at-home orders, temporarily closing businesses, restricting gatherings, restricting travel and mandating social distancing and face coverings. Certain jurisdictions have begun relaxing their restrictions only to reinstate restrictions due to increases in new COVID-19 cases. Even in areas where “stay-at-home” restrictions have been lifted and the number of cases of COVID-19 has declined, many individuals remain cautious about resuming activities such as preventive-care medical visits. Medical practices continue to be cautious about allowing individuals, such as sales representatives, into their offices. Many individuals continue to work from home rather than from an office setting. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location. As a result, COVID-19 has significantly impacted, and may continue to significantly impact, our operating results including our revenue, margins, and cash utilization, among other measures. We expect to adjust our precautionary measures at our various locations based on local recovery levels and applicable governmental regulations. Our business could be negatively affected if we take excessive, ineffective or inadequate precautions.

Despite our efforts, the ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the pandemic, third-party actions taken to contain its spread and mitigate its public health effects and short- and long-term changes in the behaviors of medical professionals and patients resulting from the pandemic.

 

17

Due to the high degree of uncertainty regarding the implementation and impact of the CARES Act and other legislation related to COVID-19, there can be no assurance as to the total amount of financial assistance we will receive or that we will be able to comply with the applicable terms and conditions for retaining such assistance.

On March 27, 2020, the CARES Act was signed into law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The CARES Act and similar legislation intended to provide assistance related to the COVID-19 pandemic also authorized $175 billion in funding to be distributed by the U.S. Department of Health and Human Services, or the HHS, to eligible health care providers. This funding, known as the Provider Relief Fund, is designated to fund eligible healthcare providers’ healthcare-related expenses or lost revenue attributable to COVID-19. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, which adds $3.0 billion to the Provider Relief Fund. Payments from the Provider Relief Fund are subject to certain eligibility criteria, as well as reporting and auditing requirements, but do not need to be repaid to the U.S. government if recipients comply with the applicable terms and conditions.

During April 2020, we received $0.8 million from the Provider Relief Fund from HHS. The payment is recorded as a component of accrued expenses and other liabilities on the consolidated balance sheet as of December 31, 2020.

During May 2020, we also received $5.0 million from a Federal Small Business Administration loan under the Paycheck Protection Program, or the PPP Loan. The PPP Loan bears interest at 1.00% per year on the outstanding principal amount and matures 24 months from the date of the note. No payments were due for the initial six-month period beginning on the date of the note. Afterwards, payments of principal and interest started to become due over the following 18 months. As of June 30, 2021, we did not make any repayments of the PPP Loan. We believe we qualify for forgiveness of the funds advanced to us under the PPP Loan and, in May 2021, we applied for forgiveness of the PPP Loan and accrued interest.

In addition, due to the high degree of uncertainty regarding the implementation of the CARES Act, the Consolidated Appropriations Act of 2021 and other stimulus legislation, there can be no assurance that the terms and conditions of the Provider Relief Fund or other relief programs will not change or be interpreted in ways that affect our ability to comply with such terms and conditions in the future, which could affect our ability to retain such assistance. HHS’s interpretation of the underlying terms and conditions of such Provider Relief Fund payments, including auditing and reporting requirements, continues to evolve. We will continue to monitor our compliance with the terms and conditions of the Provider Relief Fund, including demonstrating that the distributions received have been used for healthcare-related expenses or lost revenue attributable to COVID-19. If we are unable to comply with current or future terms and conditions, our ability to retain some or all of the distributions received may be impacted, and we may be subject to actions including payment recoupment, audits and inquiries by governmental authorities, and criminal, civil or administrative penalties.

We have a limited operating history, which could expose us to enhanced risks and increase the difficulty of evaluating our business and prospects.

We began operations in 2003 and commercially launched our first products in June 2007; however, we did not generate meaningful sales of our products until 2016, subsequent to the publication of the MINDACT Study. As a result, we have only a limited operating history upon which you can evaluate

 

18

our business and prospects. Our limited operating history makes it difficult to evaluate our current business and hinders our ability to reliably forecast our future operating results, including revenue, cash flows and progression toward sustained profitability. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in the life sciences and technology industries, such as risks related to an evolving and unpredictable industry and business model, management of growth and the other uncertainties described in this report. If our assumptions regarding these risks and uncertainties are incorrect, if these risks and uncertainties change or escalate due to fluctuations in our markets or industry or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

Our history of recurring losses and anticipated expenditures raises substantial doubts about our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

We have incurred operating losses to date and it is possible we may never generate sufficient cash flow from operations to operate as a going concern. Our financial statements included elsewhere in this prospectus have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. We have concluded that our recurring losses from operations and need for additional financing to fund future operations raise substantial doubt about our ability to continue as a going concern. The report of our independent registered public accounting firm on our consolidated financial statements as of and for the year ended December 31, 2020 included an explanatory paragraph indicating that there is substantial doubt that we will be able to continue as a going concern. If we are unable to raise sufficient capital when needed, our business, financial condition and results of operations will be harmed, and we will need to significantly modify our operational plans to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

Risks Related to Our Business and Business Strategy

Our success depends heavily on our MammaPrint and BluePrint tests.

Our ability to generate revenue depends substantially on the ongoing commercial success of our MammaPrint and BluePrint tests. There can be no assurance that we will develop or commercialize any other products or services that will generate significant revenue. The commercial success of our current and future products, and our ability to generate revenue from these products, will depend on a variety of factors, including the following:

 

•

acceptance and demand in the medical community and by our targeted patient populations;

 

•

inclusion in healthcare guidelines and recommendations, such as those developed by the American Cancer Society, or ACS, United States Preventive Services Taskforce, or USPSTF, American Society of Clinical Oncology and National Comprehensive Cancer Network, and similar guidelines and recommendations outside the United States;

 

•

inclusion in quality measures, including the Healthcare Effectiveness Data and Information Set, or HEDIS, measures and the Centers for Medicare & Medicaid Services, or CMS, Medicare Advantage Star Ratings;

 

•

recommendations and studies that may be published by government agencies, private companies, professional organizations, academic and medical journals and other key opinion leaders;

 

19

•

patient compliance with orders for our tests by healthcare providers, and patient adherence to recommendations regarding periodic re-testing;

 

•

successful sales, marketing and educational programs, including successful direct-to-patient marketing such as television advertising and social media;

 

•

the number of patients screened for breast cancer, as well as the number of patients who use our MammaPrint and BluePrint tests for that purpose;

 

•

the number of people afflicted by breast cancer;

 

•

sufficient coverage and reimbursement under government healthcare programs and by third-party payors within the United States and abroad;

 

•

the existence of federal or state laws that mandate coverage for breast cancer screening, the extent to which those laws mandate coverage of our MammaPrint and BluePrint tests and the enforcement of those laws;

 

•

the amount and nature of competition from other products and procedures;

 

•

obtaining and maintaining foreign, federal, and state regulatory certifications, licenses, or other authorizations as well as accreditations applicable to our clinical laboratories and laboratory personnel;

 

•

obtaining and maintaining regulatory authorizations to legally market our products;

 

•

changes in foreign, federal, and state regulations, including changes in FDA enforcement discretion and regulation of LDTs that may impact our product offerings;

 

•

the ease of use of our ordering process for healthcare providers;

 

•

maintaining and defending patent protection for the intellectual property relevant to our products and services;

 

•

our ability to establish and maintain adequate commercial manufacturing, distribution, sales and Clinical Laboratory Improvement Amendments of 1988, or CLIA, or College of American Pathologists, or CAP, laboratory testing capabilities;

 

•

billing and claim processing are complex and time-consuming, and any delay in submitting claims or failure to comply with applicable billing requirements could hinder collection and have an adverse effect on our revenue;

 

•

our reliance on contractual relationships with suppliers, third party contractors and strategic partners are our ability to obtain or maintain favorable terms from these parties;

 

•

ensure that our products are promoted and advertised in a manner consistent with the FDCA and implementing regulations, and that our sales and marketing personnel do not engage in off label promotion; and

 

•

if we or any of our independent contractors, consultants, collaborators, manufacturers, vendors or service providers fail to comply with healthcare and data privacy laws and regulations, we or they could be subject to enforcement actions, which could result in penalties and affect our ability to develop, market and sell our offerings and future offering candidates and may harm our reputation.

 

20

If we are unable to continue to grow sales of our MammaPrint and BluePrint tests or if we are delayed or limited in doing so, our business prospects, financial condition and results of operations would be adversely affected.

If third-party payors do not provide coverage and adequate reimbursement for our tests, or if they breach, rescind or modify their contracts or reimbursement policies or delay payments for our tests, or if we or our partners are unable to successfully negotiate payor contracts, our commercial success could be compromised.

Successful commercialization of our tests depends, in large part, on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as Medicare, Medicaid and private insurers. Each third-party payor decides whether to cover the test, the amount it will reimburse for a covered product and the specific conditions for reimbursement. Coverage and reimbursement by third-party payors may depend on a number of factors, including the payor’s determination that tests using our technologies are:

 

•

not experimental or investigational;

 

•

medically necessary;

 

•

demonstrated to lead to improved patient outcomes;

 

•

appropriate for the specific patient;

 

•

cost-saving or cost-effective;

 

•

supported by peer-reviewed medical journals; and

 

•

included in clinical guidelines.

If we are unable to provide third-party payors with sufficient evidence of the clinical utility and validity of our tests, they may not provide coverage, or may provide limited coverage, which will adversely affect our revenue and our ability to succeed. In addition, clinicians may be less likely to order a test unless third-party payors pay a substantial portion of the test price. Therefore, coverage determinations and reimbursement levels and conditions are critical to commercial success, and if we are not able to secure positive coverage determinations and reimbursement levels, our business will be materially adversely affected. Moreover, the COVID-19 pandemic may cause a delay in coverage decisions from Medicare and third-party payors, and the occurrence of which may have a material adverse effect on our business.

Third-party payors and other entities also conduct technology assessments of new medical tests and devices and provide and/or sell the results of their assessments to other parties. These assessments may be used by third-party payors and health care providers as grounds to deny coverage for or refuse to use a test or procedure. In addition, third-party payors, have increased their efforts to control the cost, utilization and delivery of healthcare services. These measures have resulted in reduced payment rates and decreased utilization for the diagnostics industry.

With respect to Medicare coverage, Palmetto GBA, or Palmetto, the Medicare Administrative Contractor, or MAC, responsible for administering Medicare’s molecular diagnostic services program, or MolDX Program, maintains a local coverage determination, or LCD, that provides coverage for our MammaPrint test. The MAC responsible for administering Medicare claims submitted by our laboratory, Noridian Healthcare Solutions, has adopted Palmetto’s positive coverage policy, along with a related

 

21

local coverage article that identifies a unique billing identifier for this test. Medicare does not currently provide coverage for our BluePrint test. Over the last several years, we have filed administrative appeals challenging denied claims with respect to our BluePrint test, most of which are pending before the Medicare Appeals Council or the Administrative Law Judge, or ALJ. The ALJ issued a fully favorable decision to us notwithstanding the fact Palmetto had not approved the tests for coverage under its LCD. The Medicare Appeals Council rejected the ALJ’s favorable decision holding that the ALJ should have deferred to the LCD and abided by Palmetto’s decision denying coverage of the testing. In October 2019, the U.S. district Court for the Central District of California reversed the decision of the Medicare Appeals Council and held that the LCD was not enforceable because it was issued without notice and opportunity for comment in violation of the Medicare statute. The government appealed this decision to the U.S. Court of Appeals for the Ninth Circuit and on July 16, 2021, a panel reversed the district court’s decision. The United States Court of Appeals for the Ninth Circuit declined our request for a rehearing en banc before for the bench to reconsider the decision of the panel. We intend to petition the United States Supreme Court to hear our appeal.

Other third-party payors make their own decisions as to whether to establish a policy to reimburse our testing products, however, and because approvals must be sought on a payor-by-payor basis, establishing broad coverage is a time-consuming and costly process. While our MammaPrint test is currently covered by a number of commercial payors, including several national health plans, there remain third-party payors who have not yet established a coverage policy applicable to MammaPrint or that consider our BluePrint test to be experimental and investigational, and therefore not covered. There can be no assurance that third-party payor policies provide coverage, or will continue to provide coverage, for our testing products. We may also experience delays and temporary interruptions in the receipt of payments from third-party payors due to changes in their internal processes, documentation requirements and other issues, which could cause our revenue to fluctuate from period to period.

If we are not successful in reversing existing non-coverage policies, or if other third-party payors issue negative coverage policies, these policies could have a material adverse effect on our business and operations. Even if several third-party payors currently reimburse for our testing products, such payors may withdraw coverage at any time, review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our testing products altogether, any of which would reduce our revenue.

Billing for our tests is complex, and we must dedicate substantial time and resources to the billing process to be paid for our tests.

Billing for our testing products is complex, time consuming and expensive. Depending on the billing arrangement and applicable law, we bill various third-party payors, including Medicare, Medicaid and private insurance companies, as well as patients, all of which have different billing requirements. We generally bill third-party payors for our testing products and pursue reimbursement on a case-by-case basis where payor contracts are not in place. We may also face increased risk in our collection efforts, including long collection cycles and potential delays in claims processing, which could adversely affect our business, results of operations and financial condition.

Several factors contribute to the complexity of the billing process, including:

 

•

differences between the list price for our testing products and the reimbursement rates of third-party payors;

 

•

compliance with complex federal and state regulations related to billing government healthcare programs including Medicare and Medicaid;

 

22

•

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

 

•

differences in coverage among third-party payors;

 

•

the effect of patient deductibles, co-payments or co-insurance;

 

•

differences in information and billing requirements among third-party payors;

 

•

changes to billing codes used for our testing products;

 

•

risk of government audits related to billing;

 

•

incorrect or missing billing information; and

 

•

the resources required to manage the billing and claims appeals process.

We use standard industry billing codes, known as CPT codes, to bill for our testing products. If these codes were to change, there is a risk of an error being made in the claim adjudication process. Such errors can occur with claims submission, third-party transmission or in the processing of the claim by the payor. Claim adjudication errors may result in a delay in payment processing or a reduction in the amount of the payment received.

As we introduce new testing products, we will need to add new codes to our billing process as well as our financial reporting systems. Failure or delays in effecting these changes in external billing and internal systems and processes could negatively affect our collection rates, revenue and cost of collecting.

Our billing activities require us to implement compliance procedures and oversight, train and monitor our employees, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance policies and procedures. When payors deny our claims, in order to obtain reimbursement for services that we provide, we may challenge coverage and payment denials. Payors also conduct external audits to evaluate payments, which add further complexity to the billing process. If the payor makes an overpayment determination, there is a risk that we may be required to return all or some portion of prior payments we have received. Additionally, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the Affordable Care Act, or ACA, established a requirement for providers and suppliers to report and return any overpayments received from government payors under the Medicare and Medicaid programs within 60 days of identification. Failure to identify and return such overpayments exposes the provider or supplier to liability under federal false claims laws.

Additionally, from time to time, third-party payors change processes that may affect timely payment. These changes may result in uneven cash flow or impact the timing of revenue recognized with these payors. With respect to payments received from governmental programs, factors such as a prolonged government shutdown could cause significant regulatory delays or could result in attempts to reduce payments made to us by federal government healthcare programs. In addition, third-party payors may refuse to ultimately make payment if their processes and requirements have not been met on a timely basis. These billing complexities, and the related uncertainty in obtaining payment for our testing products could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.

In 2020, Noridian Healthcare Solutions posted the calendar year 2021 Medicare Clinical Laboratory Fee Schedule, or CLFS, which establishes the reimbursement rates to be paid by Medicare for our jurisdiction for services performed on or after January 1, 2021. We have estimated that the

 

23

implementation of these reimbursement rates will not result in a reduction in anticipated reimbursements from Medicare for our MammaPrint testing product compared to levels experienced in 2020. In addition, beginning April 1, 2013, Medicare payments to providers were reduced by 2% under the sequestration required by the Budget Control Act of 2011, which will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through December 31, 2021 due to the COVID-19 pandemic. Revenue from Medicare comprised 25.4% and 24.5% of our revenue for the years ended December 31, 2020 and 2019, respectively, and 24.0% for the six months ended June 30, 2021. Revenue from our centralized MammaPrint and BluePrint tests comprised 95.6% and 95.8% of our revenue for the years ended December 31, 2020 and 2019, respectively, and 94.7% for the six months ended June 30, 2021.

Revenue from governmental and third-party payors can be retroactively adjusted after a new examination during the claims settlement process or as a result of post-payment audits. For example, Medicare reimbursement claims made by healthcare providers and suppliers are subject to audit from time to time by governmental and third-party payors and their agents. To ensure compliance with Medicare, Medicaid and other requirements and regulations, government agencies or their agents (including Recovery Audit Contractors, Unified Program Integrity Contractors and other contractors operating under the Medicare and Medicaid programs) often conduct audits and request customer records and other documents to support claims submitted for payment of services rendered and compliance with government program claim submission requirements. Private payors conduct similar audits to ensure claims align with coverage requirements and may take legal action to recover alleged overpayments. Negative audit findings or allegations of fraud or abuse may subject us to liability, including but not limited to overpayment liability, refunds or recoupments of previously paid claims, payment suspension, or the revocation of billing or payment privileges in governmental healthcare programs or termination of arrangements with third-party payors. Failure to comply with applicable laws relating to billing federal healthcare programs could also lead to various penalties, including but not limited to:

 

•

overpayments and recoupments of reimbursement received;

 

•

exclusion from participation in Medicare/Medicaid programs;

 

•

asset forfeitures;

 

•

civil and criminal fines and penalties; and

 

•

the loss of various licenses, certificates and authorizations necessary to operate our business.

Any of these penalties or sanctions could have a material adverse effect on our results of operations or cash flows.

Healthcare policy and payment changes may have a material adverse effect on our financial condition and results of operations.

Reimbursement to healthcare providers, such as specialized diagnostic service providers like us, is subject to continuing change in policies by third-party payors including governmental payors, such as Medicare and Medicaid, private insurers and other private payors, such as hospitals and private medical groups. Statutory and regulatory changes, retroactive rate adjustments and administrative rulings, and other policy changes may be implemented with little or no prior notice, all of which could materially decrease the range of services for which we are reimbursed or the reimbursement rates paid for our testing products.

On April 1, 2014, PAMA was signed into law, which, among other things, implemented a new payment system for clinical laboratory tests reimbursed under the CLFS. Under the law, clinical

 

24

laboratories must report laboratory test payment data for each Medicare-covered clinical diagnostic lab test that it furnishes. The reported data must include the payment rate and the volume of each test that was paid by each private third-party payor. Laboratories that fail to report the required payment information may be subject to substantial civil monetary penalties. We bill Medicare for our testing products, and therefore we are subject to reporting requirements under PAMA.

On June 23, 2016, CMS published the final rule implementing the reporting and rate-setting requirements under PAMA. For tests furnished on or after January 1, 2018, Medicare payments for clinical diagnostic laboratory tests are based upon these reported private payor rates. For clinical diagnostic laboratory tests that are assigned a new or substantially revised CPT code, initial payment rates will be assigned either through the crosswalk or gap-fill methodology, as under prior law. Crosswalking occurs when a new test or substantially revised test is determined to be similar to an existing test, multiple existing test codes, or a portion of an existing test code, which can then be utilized to determine a payment. Gap-filling occurs when no comparable, existing test is available, in which case the MACs determine local payment rates which are then used by CMS to establish a national limitation amount. The decision whether to use the crosswalking or gap-filling methodology under the CLFS can have a significant impact on payment rates and is subject to CMS’s discretion. Initial payment rates for new advanced diagnostic laboratory tests will be based on the actual list charge for the laboratory test. Under CMS’s final rule implementing PAMA, any reductions to payment rates resulting from the new methodology were originally limited to 10% per test per year in each of the years 2018 through 2020 and to 15% per test per year in each of the years 2021 through 2023. The CARES Act amended CMS’s phased-in approach by capping payment reductions under PAMA at 0% for 2021 and suspending data reporting for one year. Reporting was not required between January 1, 2020 to December 31, 2020 and will instead be required between January 1, 2022 and March 31, 2022. Additionally, the next round of rate reductions was delayed from 2021 until 2022, with tests receiving cuts of up to 15% a year from 2022 through 2024. It is difficult to predict how revisions to the CLFS based on the PAMA reporting requirements or other policy changes may affect reimbursement rates in the future.

Other laws make changes impacting clinical laboratories, many of which have already gone into effect. The ACA, enacted in March 2010, among other things, include provisions regarding the coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA. On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden issued an executive order initiating a special enrollment period from February 15, 2021 through August 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare. It is unclear how healthcare reform measures enacted by Congress or implemented by the Biden administration or other challenges to the ACA, if any, will impact the ACA or our business.

Additionally, the Budget Control Act of 2011, among other things, resulted in aggregate reductions to Medicare payments to providers of 2% per fiscal year, beginning April 1, 2013, and due to additional legislative amendments to the statute, these reductions will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through December 31, 2021, unless additional congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

 

25

Medicare payments are significant to our business, not only because approximately 25.5% and 26.3% of the total payments we received for the years ended December 31, 2020 and 2019, respectively, and 24.0% for the six months ended June 30, 2021, were derived from the Medicare program, but also because other payors often use the CLFS amounts as a benchmark to develop their payment rates. We cannot predict whether Medicare and other third-party payor reimbursement rates that mirror Medicare’s will be sufficient to make our testing products commercially attractive.

In addition, some third-party payors have implemented, or are in the process of implementing, laboratory benefit management programs, often using third-party benefit managers to manage these programs. The stated goals of these programs are to help improve the quality of outpatient laboratory services, support evidence-based guidelines for patient care and lower costs. It is possible that third-party payors will resist reimbursement for testing products that we offer in favor of less expensive tests, may require pre-approval for our testing products or may impose additional pricing pressure on and substantial administrative burden for reimbursement for our testing products.

Product pricing by companies is currently, and is expected to continue to be, under close scrutiny. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and patient programs, and reform government program reimbursement methodologies for products. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures.

We also cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we do or may do business in the future, or the effect any future legislation or regulation will have on us, including any initiatives implemented by the new Biden administration. Although we cannot predict the full effect of the recent legislative changes discussed above, cost reduction measures, the expansion in government’s role in the U.S. healthcare industry and PAMA’s changes to the reimbursement methodology under the CLFS, such changes individually or in the aggregate may result in decreased profits to us and/or lower reimbursement by third-party payors for our testing products, which may adversely affect our business, financial condition and results of operations.

Compliance with the terms and conditions of our Corporate Integrity Agreement requires significant resources and, if we fail to comply, we could be subject to monetary penalties and/or excluded from participation in government healthcare programs, which could harm our results of operations, liquidity and financial condition.

In June 2020, we entered into a settlement with the U.S. Department of Justice, or DOJ, to resolve a qui tam litigation matter, United States ex rel. Flick v. Agendia, Inc., which was filed in the U.S. District Court for the Western District of Kentucky. The suit alleged that we conspired with hospitals to delay ordering MammaPrint tests for patients to circumvent Medicare’s “14-Day Rule” to enable us to bill Medicare directly for the tests. During the period covered by the settlement, Medicare’s “14-Day Rule” then in effect prohibited laboratories from separately billing Medicare for tests performed on samples if a physician ordered the test within 14 days of a patient’s discharge from a hospital; instead, the laboratories were required to bill the hospital for such tests. Following the DOJ settlement, we entered into a five-year Corporate Integrity Agreement, or CIA, with the U.S. Department of Health and Human Services Office of Inspector General, or OIG, effective January 13, 2021. The CIA requires, among other matters, that we maintain a Compliance Officer, a Compliance Committee, board review and oversight of healthcare compliance matters, compliance programs, and disclosure programs; provide management certifications and compliance training and education; engage an independent

 

26

review organization to conduct claims reviews; implement a risk assessment and internal review process; and submit periodic reports to the OIG regarding our compliance program and CIA implementation. The CIA also requires us to report substantial overpayments that we discover we received from federal health care programs, as well as probable violations of federal health care laws. While we believe that we have developed and instituted a corporate compliance program consistent with the terms of the CIA, we cannot guarantee that we, our employees, our consultants or our contractors are or will be in compliance with all potentially applicable federal healthcare laws or all requirements of the CIA. Our failure to comply with our obligations under the CIA could result in monetary penalties and our exclusion from participating in federal healthcare programs. In addition, the costs associated with compliance with the CIA, or any liability or consequences associated with its breach, could have an adverse effect on our operations, liquidity and financial condition. See “Risk Factors—Risks Related to Government Regulation—If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.”

Our business and reputation will suffer if we are unable to establish and comply with stringent quality standards to assure that the highest level of quality is observed in the performance of our tests.

Inherent risks are involved in providing and marketing our products. Patients and healthcare providers rely on us to provide accurate clinical and diagnostic information that may be used to make critical healthcare decisions. As such, our customers and users of our tests will have significant sensitivity to errors.

We must maintain top service standards and FDA-mandated and other quality controls. Past or future performance or accuracy defects, incomplete or improper process controls, excessively slow turnaround times, unanticipated uses of our tests or mishandling of samples or test results, or other human errors by our employees or third parties in processing our tests or transmitting our test results (whether by us, patients, healthcare providers, courier delivery services or others) could lead to adverse outcomes for patients and interruptions to our services. Such events could lead to voluntary or legally mandated safety alerts relating to our tests or laboratory facilities or those of third parties processing our tests, and could result in the removal of our products and services from the market, the suspension of our laboratories’ operations. Insufficient quality controls or human error, and resulting negative outcomes, could result in significant costs and litigation, as well as negative publicity that could reduce demand for our tests and payors’ willingness to cover our tests. Even if we maintain adequate controls and procedures, damaging and costly errors may occur.

If our tests, or our competitors’ tests, do not meet the expectations of patients and physicians, our operating results, reputation and business could suffer.

Our success depends on the market’s confidence that we can provide reliable, high-quality precision oncology diagnostic products that will improve clinical outcomes, improve quality of life for patients, lower healthcare costs and enable better biopharmaceutical development. We believe that patients, clinicians and biopharmaceutical companies are likely to be particularly sensitive to product defects and errors in the use of our products, including if our products fail to detect genomic alterations with high accuracy from samples or if we fail to consistently report results of tests run or inaccurately include certain treatment options and available clinical trials in our test reports, and there can be no guarantee that our products will be free from such defects and errors. Furthermore, if our competitors’ products do not perform to expectations, such underperformance may result in lower confidence in our tests as well. As a result, the failure of both our products or our competitors’ products to perform as expected could significantly impair our operating results and our reputation. In addition, we may be subject to legal claims arising from any defects or errors in our products.

 

27

We have limited experience marketing and selling our solutions, and if we are unable to expand our sales organization to adequately address our customers’ needs, our business may be adversely affected.

We have limited experience marketing and selling our products and we may not be able to market, sell or distribute our products and tests, and other products we may develop effectively enough to support our planned growth. We currently sell to clinicians in the United States through our own sales organization. Each of our target markets is large, distinctive and diverse. As a result, we believe it is necessary for our sales representatives and partners to have established and relevant expertise. Competition for such employees within the precision oncology industry is intense. We may not be able to attract and retain personnel or be able to build an efficient and effective sales organization or business development team, which could negatively impact sales and market acceptance of our products and limit our revenue growth and potential profitability.

Our expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Our future financial performance and our ability to commercialize our products, to increase our sales and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.

We sell our products directly in the United States and Canada, and throughout the rest of the world we sell our products through core laboratories, hospitals, and other distribution channels locating, qualifying, engaging and maintaining relationships with distribution partners and hospitals with local industry experience and knowledge will be necessary to effectively market and sell our products outside the United States. We may not be successful in finding, attracting and retaining distribution partners or local hospitals, or we may not be able to enter into such arrangements on favorable terms. Sales practices utilized by any such parties that are locally acceptable may not comply with sales practices standards required under U.S. laws that apply to us, which could create additional compliance risk. If our international sales and marketing efforts are not successful, we may not achieve market acceptance for our products outside the United States, which would materially and adversely impact our business.

We face intense competition, which could intensify further in the future, and we may fail to maintain or increase our revenue levels, maintain or improve the current prices and margins for our tests or achieve or sustain profitability if other companies or institutions develop and market novel or improved technologies that make our technologies less competitive or obsolete or if otherwise cannot compete successfully.

The precision oncology diagnostics market has become increasingly competitive and we face competition from a variety of sources, including a number of companies, such as Exact Sciences Corporation, who have developed and commercialized breast cancer screening tests and established and emerging healthcare, information technology and service companies that may develop and sell competitive products or services, which may include informatics, analysis, integrated genetic tools and services for health and wellness. Additionally, participants in closely related markets, such as prenatal testing, breast screening, non-breast cancer molecular diagnostics and clinical trial or companion diagnostic testing, could converge on offerings that are competitive with the tests we perform. Instances where potential competitors are aligned with key suppliers or are themselves suppliers could provide these potential competitors with significant advantages. Many of our existing and potential future competitors have longer operating histories, larger customer bases, more expansive brand recognition, deeper market penetration, substantially greater financial, technological and research and development resources, including selling and marketing capabilities, and are considerably more experienced in dealing with third-party payors. As a result, these potential competitors may be able to

 

28

respond more quickly to changes in customer requirements or preferences, develop faster, better and more expansive advancements for their technologies and tests, create and implement more successful strategies for the promotion and sale of their tests, obtain more favorable results from third-party payors regarding coverage and reimbursement for their offerings, adopt more aggressive pricing and price reduction policies for their tests, secure supplies from vendors on more favorable terms or devote substantially more resources to infrastructure and systems development compared to what we would be able to obtain. Moreover, as more information regarding cancer genomics becomes available to the public, we anticipate that competition will further increase. We may not be able to compete effectively against these organizations.

Our tests face competition from alternative testing methodologies that currently exist or that could be developed by our competitors. It is possible that our competitors could, in the future, develop tests that are more accurate or less costly than our test offerings, which could render our tests obsolete. Our tests may also face increased competition in the future from commercial laboratories with strong distribution networks for tests. For example, Veracyte offers its Prosigna test on the nCounter platform and Myriad offers its 12-gene EndoPredict test. Other potential competitors include companies that develop tests, such as Natera and Exact Sciences, as well as other companies and academic and research institutions.

Additionally, increased competition and cost-saving initiatives on the part of government entities and other third-party payors could result in downward pressure on the price for our tests, which could harm our revenue levels, sales volume and our ability to gain market share. This downward pricing pressure could intensify in future periods and we may not be able to maintain acceptable margins on our sales if we are forced to reduce prices for our tests to try to remain competitive, especially if we are also increasing our expenses as we make efforts to grow our business or otherwise meet customer demands. The occurrence of these risks could materially harm our ability to achieve or sustain profitability. In addition, competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies. Further, companies or governments that effectively control access to testing through umbrella contracts or regional preferences could promote our competitors or prevent us from performing certain tests in certain territories.

In addition to our on-market products, we intend to develop liquid biopsy-based MRD detection testing capabilities in the future. We are aware of a number of companies, including Roche, Natera, Bio-Rad Laboratories and Guardant Health that have developed, or are developing, tests for the detection of breast cancer. These tests could represent significant competition for our current tests, as well as other tests we intend to develop.

If we are unable to compete successfully against current and future competitors for these or any other reasons, we may be unable to increase market acceptance and sales volume of our tests, which could prevent us from maintaining or increasing our revenue levels or achieving or sustaining profitability or could otherwise negatively affect our performance.

New tests and product development involve a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any of the tests or products we develop individually or with our collaborators.

At any point, we may delay or abandon a development program, or we may be required to expend unanticipated and considerable resources to conduct or repeat clinical studies, which could adversely impact potential revenue and our planned expenses. In addition, any delay in product development could provide our competitors with additional time to commercialize competing products before we do, which in turn may adversely affect our growth prospects and operating results. In addition, the success

 

29

of the development programs that require collaboration with third parties, such as our collaborations with each of Paige.AI and Inivata Ltd., will be dependent on the continued success of such collaborators. There is no guarantee that our collaborators will continue to be successful and, as a result, we may expend considerable time and resources developing diagnostic assays that will not ultimately be commercialized.

If we cannot successfully maintain or manage our current, or enter into new, relationships with outside third parties, our product development could be delayed and our introduction of new products into the market could be adversely affected which could have an adverse effect on our financial results.

We rely on and expect to continue to rely on clinical collaborators to perform a substantial portion of our clinical trial functions. 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 of the products contemplated by the collaboration could be delayed or terminated. If any of our collaboration agreements are terminated, or if we are unable to renew those agreements on acceptable terms, we would be required to seek alternatives. We may not be able to negotiate agreements with alternate collaborators on acceptable terms, if at all, and these collaborations may not be successful.

In the past, we have entered into clinical trial collaborations with highly regarded organizations in the cancer field. Our success in the future depends in part on our ability to enter into agreements with other leading cancer organizations. This can be difficult due to internal and external constraints placed on these organizations. Some organizations may limit the number of collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative and related infrastructure to enable collaborations with many companies at once, which can prolong the time it takes to develop, negotiate and implement collaboration. Additionally, organizations often insist on retaining the rights to publish the clinical data resulting from the collaboration. We have found the publication of clinical data in peer-reviewed journals to be a crucial step in commercializing and obtaining reimbursement for tests such as ours, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenue from any product that may result from a collaboration.

If any of our facilities or our laboratory equipment is damaged or destroyed, or if we experience a significant disruption in our operations for any reason, our ability to continue to operate our business could be materially harmed.

As we expand the commercialization of products and services and increase the number of tests processed by our laboratory facilities, we believe it may be necessary to both expand our existing laboratory facilities and to add one or more new manufacturing and laboratory facilities in order to increase our manufacturing and processing capacity to meet anticipated demand. We estimate our current capacity is sufficient to perform 140,000 MammaPrint and BluePrint tests per year. Our financial condition will be adversely affected if demand for our products and services does not materialize in line with our current expectations and if, as a result, we end up building excess capacity that does not yield a reasonable return on our investment.

If our facilities were to be damaged, destroyed or otherwise unable to operate, whether due to fire, floods, storms, tornadoes, earthquakes, other inclement weather events or natural disasters, employee malfeasance, terrorist acts, power outages, or otherwise, it may render it difficult or impossible for us to perform our tests for some period of time and our business could be severely disrupted. Our Irvine, California headquarters are located in Southern Califiornia, which is prone to both wildfires and earthquakes. Our facilities and the equipment we use to perform our tests would be costly to replace and could require substantial lead time to repair or replace. The inability to perform our tests or the

 

30

backlog of tests that could develop if any of our facilities become inoperable for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we possess insurance for damage to our property 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, if at all.

Our industry is subject to rapidly changing technology and new and increasing amounts of scientific data, and if we fail to keep pace with these technological advances, we may be unable to compete effectively and our business and prospects could suffer.

In recent years, there have been numerous advances in the ability to analyze large amounts of genomic information and the role of genetics and gene variants in disease diagnosis and treatment. Our industry has been, and we believe will continue to be, characterized by rapid technological change, increasing amounts of data, frequent introductions of new genetic tests and evolving industry standards, all of which could make our tests obsolete if we are not able to enhance our technologies and tests faster and better than our competitors. We believe our future success will depend in part on our ability to keep pace with the evolving needs of our customers in a timely and cost-effective manner and to pursue new market opportunities that develop as a result of technological and scientific advances. If we are not able to keep pace with these advances and increased customer expectations that develop as a result of these advances, we may be unable to sustain or grow our business and our future operations and prospects could suffer.

Failure in, or security breaches or incidents impacting, our information technology, storage systems or our clinical laboratory equipment could significantly disrupt our operations and our research and development efforts.

Our ability to execute our business strategy depends, in part, on the continued and uninterrupted performance of our information technology, or IT, systems, which support our operations, including at our clinical laboratories, and our research and development efforts. We are dependent on our IT systems for many aspects of our business, including our needs to retain and store our confidential and proprietary business information and to receive and process test orders, securely store patient health records and deliver the results of our tests. The integrity and protection of our own data, and that of our customers and employees, is critical to our business. The regulatory environment governing information, security and privacy and data protection laws is increasingly demanding and continues to evolve. IT systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, cyberattacks (including ransomware attacks) and other malicious human acts from criminal hackers, hacktivists, state-sponsored intrusions and other attacks, industrial espionage and employee malfeasance, breaches and incidents due to employee error or negligence, 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 other malicious code similar disruptive problems.

High-profile security breaches and incidents at other companies and in government agencies have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyber-attacks targeting businesses such as ours. Cyber-attacks are becoming more sophisticated and frequent, and in some cases have caused significant harm. Computer hackers and others routinely attempt to breach the security of technology products, services and systems, and to fraudulently induce employees, customers, or others to disclosure information or unwittingly provide access to systems or data. In connection with the COVID-19 pandemic, much of our workforce currently works remotely rather than in our offices, and we may be more susceptible to security breaches and incidents as a result. Our service providers may be more susceptible to security breaches and other security incidents while social distancing measures restrict the ability of their employees to work at offices to combat the COVID-19 pandemic. Further, we engage third-party

 

31

service providers to store and otherwise process sensitive and personal information, including our contract research organizations, or CROs. Our CROs and other service providers, consultants and collaborators face substantial risks of security breaches and incidents.

We may in the future experience attempted or successful cyber-attacks of our IT systems or networks. To date, we have not experienced any material cyber-attacks. However, any security breach or incident impacting, or interruption could compromise our networks and the information stored therein, including algorithms relating to our products, could be accessed by unauthorized parties, publicly disclosed, lost, inaccessible or unavailable, corrupted, or stolen. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our IT systems, unauthorized access to our systems, or disruptions or other security breaches impacting our IT systems, and any unauthorized access to, or, loss, inaccessibility, unavailability, corruption, theft or disclosure could also disrupt our operations, including our ability to:

 

•

process tests, provide test results, bill payors or patients;

 

•

process claims and appeals;

 

•

provide customer assistance services;

 

•

conduct research and development activities;

 

•

collect, process and prepare company financial information;

 

•

provide information about our tests and other patient and healthcare provider education and outreach efforts through our website; and

 

•

and manage the administrative aspects of our business and damage our reputation.

Any such breach, incident, or other compromise of IT systems or data, or the perception that any of these has occurred, could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, similar U.S. state data protection regulations, including the California Consumer Privacy Act, or CCPA, the EU General Data Protection Regulation, or GDPR, and other regulations, the breach of which could result in claims, complaints, regulatory investigations and other proceedings, and significant fines, penalties, and other liability. We also may be required to incur significant costs in an effort to detect and prevent security breaches and other security-related incidents. Additionally, information obtained by third parties in connection with past or future cyberattacks or other security breaches or incidents could be used in ways that adversely affect our company or our stockholders.

Further, third-party service providers who support our operations, and our independent contractors (including CROs), consultants, collaborators, and service providers also may suffer interruptions and disruptions of systems and other breaches, incidents, or other compromises of or impacting their IT systems or data that they process or maintain for us, which may lead to any of the foregoing. We and our third-party service providers may not have the resources or technical sophistication to anticipate or prevent all cyberattacks or other sources of security breaches or incidents, and we or they may face difficulties or delays in identifying and responding to cyberattacks and data security breaches and incidents. In addition, the interpretation and application of consumer, health related and security, privacy and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux, such as in the area of international transfers of personal data. Complying with these various laws, and satisfying healthcare providers’ and patients’ evolving expectations with respect to data protection, 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.

 

32

While our insurance policies include liability coverage for certain cybersecurity-related matters, subject to applicable deductibles, our insurance coverage might not be adequate for data handling or data security liabilities actually incurred, such insurance may not continue to be available to us in the future on economically reasonable terms, or at all, and insurers may deny us coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.

If we or any of our independent contractors, consultants, collaborators, manufacturers, vendors or service providers fail to comply with healthcare and data privacy laws and regulations, we or they could be subject to enforcement actions, which could result in penalties and affect our ability to develop, market and sell our offerings and future offering candidates and may harm our reputation.

We are or may in the future be subject to federal, state, and foreign healthcare and data privacy laws and regulations pertaining to, among other things, fraud and abuse, data protection and patients’ rights. These laws and regulations include, but are not limited to:

 

•

the U.S. federal Anti-Kickback Statute, or AKS, which prohibits, among other things, persons and entities from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid;

 

•

the U.S. federal false claims and civil monetary penalties laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting or causing to be presented, claims for payment by government funded programs such as Medicare or Medicaid that are false or fraudulent, and which may apply to us by virtue of statements and representations made to customers or third parties;

 

•

HIPAA, which created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing or attempting to execute a scheme to defraud healthcare programs;

 

•

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, which imposes requirements on certain types of people and entities relating to the privacy, security, and transmission of individually identifiable protected health information, or PHI, and requires notification to affected individuals and regulatory authorities of certain breaches of security of PHI;

 

•

the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, to report annually to CMS information related to payments and other transfers of value to covered recipients, including physicians, other healthcare providers and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members, which is published in a searchable form on an annual basis; effective January 1, 2022, our reporting obligations with respect to payments or transfers of value made to covered recipients in the previous year, or data collected in 2021, will be expanded to include physician assistants, nurse practitioners, clinical nurse specialists, certified registered nurse anesthetists, and anesthesiologist assistants, and certified nurse-midwives; and

 

33

•

state laws comparable to each of the above federal laws, such as, for example, anti-kickback and false claims laws that may be broader in scope and also apply to commercial insurers and other non-federal payors, requirements for mandatory corporate regulatory compliance programs, and laws relating to patient data privacy and security. Other state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government; require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

In the European Union, or EU, the GDPR was adopted in 2016 and took effect on May 25, 2018. The GDPR is intended to harmonize data protection requirements across the EU member states by establishing new and expanded operational requirements for entities that process, or control personal data generated in the EU, including consent requirements for disclosing the way personal information will be used, information retention requirements, notification requirements in the event of a data breach, and other requirements. In addition, the GDPR imposes strict rules on the transfer of personal data out of the EU to the United States. These obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other requirements or our practices. Recent developments have also created uncertainty regarding the rules around such data transfers.

Any actual or alleged violation of the GDPR could result in regulatory investigations and other proceedings, reputational damage, orders to cease or change our processing of our data, enforcement notices, or assessment notices (for a compulsory audit). We may also face civil claims including representative actions and other class action type litigation (where individuals have suffered harm), potentially amounting to significant compensation or damages liabilities, as well as associated costs, diversion of internal resources, and reputational harm. Additionally, following the United Kingdom’s exit from the EU, the United Kingdom is a “third country” under the GDPR. In particular, from and after January 2021, we face exposure in the European Economic Area, or EEA, and the United Kingdom under two parallel regimes, each with the power to impose fines up to the greater of either 4% of total global annual revenue, or €20.0 million (for the EU) or £17.5 million (for the United Kingdom). On June 28, 2021, the European Commission announced a decision of “adequacy” concluding that the United Kingdom ensures an equivalent level of data protection to the GDPR, which is anticipated to support legality of personal data flows from the EEA to the United Kingdom. Some uncertainty remains, however, as this adequacy determination must be renewed after four years and may be modified or revoked in the interim. We cannot fully predict how the Data Protection Act, the UK GDPR, and other United Kingdom data protection laws or regulations may develop in the medium to longer term nor the effects of divergent laws and guidance regarding how data transfers to and from the United Kingdom will be regulated. We may incur liabilities, expenses, costs, and other operational losses under the GDPR, and applicable laws and regulations relating to privacy and data protection of European member states and the United Kingdom, in connection with any measures we take to comply with them.

In July 2020, the Court of Justice of the EU, or CJEU, invalidated the EU-United States Privacy Shield as a mechanism for managing personal data transfers between the EU and the United States and onward to other countries. Additionally, in September 2020, the Federal Data Protection and Information Commissioner of Switzerland opined that the Swiss-United States Privacy Shield did not provide an adequate level of protection for data transfers from Switzerland to the United States pursuant to Swiss data protection law. While the CJEU upheld the adequacy of EU-specified standard contractual clauses, or SCCs, a form of contract approved by the European Commission as an adequate data transfer mechanism, the CJEU made clear that reliance on them alone may not

 

34

necessarily be sufficient in all circumstances and that their use must be assessed on a case-by-case basis taking into account the surveillance laws and right of individuals in the U.S and other onward countries. Data protection authorities may require measures to be put in place in addition to the SCCs for transfers to countries outside of the EEA, as well as Switzerland and the United Kingdom. Further, the European Commission released a draft of revised SCCs addressing the CJEU concerns in November 2020, and on June 4, 2021, published new SCCs. We may be unsuccessful in maintaining appropriate compliance mechanisms for our transfer and receipt of personal data from the EEA or the United Kingdom to other jurisdictions and may be at risk of experiencing reluctance or refusal of European or multi-national partners, clinical trial sites or other third parties with whom we do business and incurring potential regulatory penalties. Further, the CJEU’s decision, revised SCCs, regulatory guidance and opinions, and other developments relating to cross-border data transfer may require us to implement additional contractual and technical safeguards for any personal data transferred out of the EEA, which may increase compliance costs, lead to increased regulatory scrutiny or liability, may require additional contractual negotiations, and may adversely impact our business, financial condition and operating results.

Outside of the EU, many countries and territories have laws, regulations, or other requirements relating to privacy, data protection, information security, localized storage of data, and consumer protection, and new countries and territories are adopting such legislation or other obligations with increasing frequency. In the United States, numerous federal and state laws and regulations apply to the collection, use, and other processing of personal information. For example, HIPAA imposes obligations on “covered entities,” including certain healthcare providers, such as us, health plans, and healthcare clearinghouses, and their respective “business associates” that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, as well as their covered subcontractors with respect to safeguarding the privacy, security and transmission of individually identifiable health information. Entities that are found to be in violation of HIPAA, whether as the result of a breach of unsecured PHI, a complaint about privacy practices, or an audit by HHS, may be subject to significant civil, criminal, and administrative fines and penalties or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.

Further, state and federal lawmakers and regulatory authorities have increased their attention on the collection and use of personal information. For example, California enacted the CCPA, which became operative on January 1, 2020 and became enforceable by California Attorney General on July 1, 2020, along with related regulations which came into force on August 14, 2020. The CCPA gives California residents new rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is collected, used, and shared. Additionally, the CCPA has prompted a number of proposals for new federal and state-level privacy legislation. Further, in November 2020, California voters passed the California Privacy Rights Act, or CPRA. The CPRA, which is expected to take effect on January 1, 2023 and to create obligations with respect to certain data relating to consumers as of January 1, 2022, significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations, granting additional rights to consumers, such as correction of personal information and additional opt-out rights, and creates a new entity, the California Privacy Protection Agency, to implement and enforce the law. The CCPA and CPRA present many unresolved compliance complexities. The CCPA and CPRA may increase our compliance costs and potential liability. In addition to the CCPA, numerous other states’ legislatures are considering similar laws that will require ongoing compliance efforts and investment. For example, in March 2021, Virginia enacted a Consumer Data Protection Act that will go into effect on January 1, 2023 and in June 2021, Colorado enacted a Colorado Privacy Act that will go into effect on July 1, 2023, both of which share similarities with the CCPA, CPRA, and legislation proposed in other states.

 

35

Additionally, if our operations are found to be in violation of any such health care and data privacy laws and regulations, we may be subject to penalties, including administrative, civil and criminal penalties, monetary damages, disgorgement, imprisonment, the curtailment or restructuring of our operations, loss of eligibility to obtain approvals from the FDA or foreign regulatory authorities, fees from regulators, fines, significant settlements or judgments resulting from the CCPA’s private right of action, or exclusion from participation in government contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, or other restrictions on our operations, any of which could adversely impact our financial results. Any action against us for an alleged or suspected violation by a private party or governmental agency could cause us to incur significant legal expenses, adversely impact our reputation, and could divert our management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining compliance with applicable laws and regulations may be costly to us in terms of money, time and resources.

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

Our business depends on our ability to quickly and reliably deliver test results to our customers. We typically receive samples from customers within days of shipment, or in some cases overnight, for analysis at our laboratory facilities. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disasters, pandemics or epidemics, terrorist acts or threats or for other reasons, could adversely affect sample integrity and our ability to process samples in a timely manner and otherwise service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.

If we use hazardous materials in a manner that causes injury, we could be liable for damages.

Our activities currently require the use of hazardous materials and medical samples. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials or samples. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products, as well as regulations relating to the safety and health of laboratory employees. The cost of compliance with these laws and regulations may become significant and could negatively affect our operating results.

Our mix of government and commercial payors can fluctuate from period to period and our revenue may be concentrated among only a small number of payors.

The composition of our payor base can fluctuate from period to period, and in certain prior periods, a small number of payors accounted for a significant portion of our revenue. As a result, changes in payor mix from period to period can have a significant impact on our period-to-period performance regardless of its cause. Similarly, given the concentration of our payor base, a reduction in, or withdrawal of, coverage by one or more of these payors could significantly reduce our revenue and adversely affect our operating results.

The success of our business is substantially dependent upon the efforts of our senior management team and our ability to attract and retain personnel.

Our success depends largely on the skills, experience and performance of key members of our senior management team. Our executives are critical to directing and managing our growth and

 

36

development in the future. Our success is substantially dependent upon our senior management’s ability to lead our company, implement successful corporate strategies and initiatives, develop key relationships, including relationships with collaborators and business partners, and successfully commercialize products and services. If we were to lose any of our senior management team, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategies.

Competition for desirable personnel is intense, and there can be no assurance that we will be able to attract and retain the necessary staff. Our research and development programs, commercial laboratory operations and information technology infrastructure depend on our ability to attract and retain highly skilled personnel. We may not be able to attract or retain qualified talent due to the competition for qualified personnel among life science and technology businesses, particularly in Southern California. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. In addition, our success depends on our ability to attract and retain salespeople with extensive experience in oncology and close relationships with healthcare providers and other clinical personnel. All of our employees in the United States are at-will, which means that either we or the employee may terminate their employment at any time. If we are not able to attract and retain the necessary personnel, our business and operating results could be harmed.

Our business and reputation will suffer if we are unable to establish and comply with, stringent quality standards to assure that the highest level of quality is observed in the performance of our tests.

Inherent risks are involved in providing and marketing breast cancer products and related services. Patients and healthcare providers rely on us to provide accurate clinical and diagnostic information that may be used to make critical healthcare decisions. As such, users of our tests may have a greater sensitivity to errors than users of some other types of products and services.

We must maintain top service standards and CLIA, CAP, FDA and EU-mandated and other quality controls. Past or future performance or accuracy defects, incomplete or improper process controls, excessively slow turnaround times, unanticipated uses of our tests or mishandling of samples or test results (whether by us, patients, healthcare providers, courier delivery services or others) can lead to adverse outcomes for patients and interruptions to our services. These events could lead to voluntary or legally mandated safety alerts relating to our tests or our laboratory facilities and could result in the removal of our products and services from the market or the suspension of our laboratories’ operations. Insufficient quality controls and any resulting negative outcomes could result in significant costs and litigation, as well as negative publicity that could reduce demand for our tests and payors’ willingness to cover our tests. Even if we maintain adequate controls and procedures, damaging and costly errors may occur.

Product and professional liability suits against us could result in expensive and time-consuming litigation, payment of substantial damages and increases in our insurance rates.

The sale and use of our tests could lead to product or professional liability claims. We may also be subject to liability for errors in the test results we provide to healthcare providers or for a misunderstanding of, or inappropriate reliance upon, the information we provide. Claims could also arise out of clinical studies we may conduct or any of our other activities. A product or professional liability claim could result in substantial damages, be costly and time consuming to defend and cause material harm to our business, reputation or financial condition. We cannot assure that our liability insurance will adequately protect our assets from the financial impact of defending any such claims. Any claim brought against us, with or without merit, could increase our liability insurance rates or prevent us from securing insurance coverage in the future.

 

37

Our international operations expose us to business, regulatory, political, operational, financial, liability, compliance and economic risks associated with doing business outside of the United States.

We currently operate in various countries outside of the United States. Doing business internationally involves a number of risks, including:

 

•

difficulties in complying with multiple, conflicting and changing laws and regulations, such as tax laws, export and import restrictions, employment laws, data security, privacy and data protection laws, regulatory requirements and other governmental approvals, permits and licenses;

 

•

significant competition from local and regional product offerings;

 

•

difficulties in complying with product regulations in various jurisdictions, including the changing regulation in the EU, with regard to in vitro diagnostic medical devices, or IVD, regulations;

 

•

obtaining regulatory clearance, approval or certification where required for our products in foreign countries;

 

•

restrictions or prohibitions of transmitting personal data, including patient data, from foreign jurisdictions to our centralized laboratories in the United States;

 

•

difficulties in staffing and managing foreign operations;

 

•

complexities associated with managing multiple payor reimbursement regimes, public payors or patient self-pay systems;

 

•

logistics and regulations associated with shipping tissue samples or complying with local regulations concerning the analysis of tissue, including infrastructure conditions and transportation delays;

 

•

limits in our ability to access or penetrate international markets if we are not able to process tests locally;

 

•

lack of, uncertain or incomplete intellectual property protection in certain markets;

 

•

financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our tests and exposure to foreign currency exchange rate fluctuations;

 

•

natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;

 

•

regulatory and compliance risks that relate to maintaining accurate information and control over the activities of our salesforce and distributors that may fall within the purview of the U.S. FCPA, its books and records provisions or its anti-bribery provisions, or similar anti-bribery or anti-corruption laws or regulations, such as the U.K. Anti-bribery Act and the U.K. Criminal Finances Act; and

 

•

complexity of compliance with local standard contractual requirements to access public customers and payors.

 

38

From an anti-bribery and anti-corruption perspective, our business activities are subject to the FCPA and additional anti-bribery or anti-corruption laws, regulations, and rules of the countries that we operate in. These laws generally prohibit companies and their employees and third party business partners, representatives, and agents from engaging in corruption and bribery, including offering, promising, giving, or authorizing the provision of anything of value, either directly or indirectly, to a government official or commercial party to influence any official action, direct business to any person, gain any improper advantage, or obtain or retain business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly. We and our third-party partners may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for inaccurate or incomplete accounting records, internal accounting controls deemed inadequate by applicable regulatory authorities, and corrupt or other illegal activities of our employees, affiliates, third parties, representatives, and agents even if we did not explicitly authorize those activities. This risk is even greater in the countries where we operate that are known to present a heightened risk for corruption.

Any of these factors could significantly harm our future international expansion and operations and, consequently, our financial condition and results of operations.

We may acquire businesses or assets, form joint ventures, make investments in other companies or technologies or establish other strategic relationships, any of which could harm our operating results, dilute our shareholders’ ownership or cause us to incur debt or significant expense.

As part of our business strategy, we may pursue acquisitions of complementary businesses or assets, investments in other companies, technology licensing arrangements, joint ventures or other strategic relationships. As an organization, we have limited experience with respect to acquisitions, investments or the formation of strategic relationships or joint ventures. If we make acquisitions in the future, we may not be able to successfully integrate the acquired businesses or technologies into our existing operations, we could assume unknown or contingent liabilities and we could be forced to record significant write-offs or incur debt as a result of the acquisitions, any of which could harm our operating results. Further, integration of an acquired business or technology could involve significant difficulties, and could require management and capital resources that otherwise would be available for ongoing development of our existing business or pursuit of other opportunities. If we pursue strategic relationships, our ability to establish and maintain these relationships could be challenging due to several factors, including competition with other breast cancer product companies and internal and external constraints placed on pharmaceutical and other organizations that limit the number and type of relationships they can establish with companies like ours. Moreover, we may not be able to identify or complete any acquisition, investment, technology license, joint venture or other strategic relationship in a timely manner, on a cost-effective basis or at all, and we may not realize the anticipated benefits of any such transaction sufficiently to recoup our costs.

To finance any acquisitions, investments, joint ventures or other strategic relationships, we may seek to raise additional funds through securities offerings, credit facilities, asset sales or collaborations or licensing arrangements. Each of these methods of fundraising is subject to a variety of risks, including those discussed above under “—Our inability to raise additional capital on acceptable terms, or at all, in the future may limit our ability to develop and commercialize new tests and expand our operations.” Further, additional funds from capital-raising transactions may not be available when needed, on acceptable terms or at all. Any inability to fund any acquisitions, investments or strategic relationships we pursue could cause us to forfeit opportunities we believe are promising or valuable, which could harm our prospects.

 

39

Risks Related to Government Regulation

Complying with numerous regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.

We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on samples derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations mandate specific standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. We have a current certificate of accreditation under CLIA to perform testing through our accreditation by CAP. To renew this certificate, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory.

Although we are required to hold a certificate of accreditation or compliance under CLIA that allows us to perform high complexity testing, we are not required to hold a certificate of accreditation through CAP. We could alternatively maintain a certificate of accreditation from another accrediting organization or a certificate of compliance through inspection by surveyors acting on behalf of the CLIA program. If our accreditation under CAP were to terminate, either voluntarily or involuntarily, we would need to convert our certification under CLIA to a certificate of compliance (or to a certificate of accreditation with another accreditation organization) in order to maintain our ability to perform clinical testing and to continue commercial operations. Whether we would be able to successfully maintain operations through either of these alternatives would depend upon the facts and circumstances surrounding termination of our CAP accreditation, such as whether any deficiencies were identified by CAP as the basis for termination and, if so, whether these were addressed to the satisfaction of the surveyors for the CLIA program (or another accrediting organization).

The failure to comply with CLIA requirements can result in enforcement actions, including the revocation, suspension, or limitation of our CLIA certificate of accreditation, as well as a directed plan of correction, state on-site monitoring, civil money penalties, civil injunctive suit and/or criminal penalties. We must maintain CLIA compliance and certification to be eligible to bill for tests provided to Medicare beneficiaries. If we were to be found out of compliance with CLIA program requirements and subjected to sanctions, our business and reputation could be harmed. Even if it were possible for us to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.

We are also required to maintain a license to conduct testing in California. California laws establish standards for day-to-day operation of our clinical reference laboratory, including the training and skills required of personnel and quality control. In addition, our clinical reference laboratory is licensed on a product-specific basis by New York as an out-of-state laboratory and our testing products, as LDTs, must be approved by the New York Department of Health, or NYDOH, on a product-by-product basis before they are offered in New York. We are also be subject to periodic inspection by the NYDOH and required to demonstrate ongoing compliance with NYDOH regulations and standards. To the extent NYDOH identified any non-compliance and we are unable to implement satisfactory corrective actions to remedy such non-compliance, the State of New York could withdraw approval for our testing products. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether or not such laboratories are located in New York. Moreover, several other states require that we hold licenses to test samples from patients in those states. Other states may have similar requirements or may adopt similar requirements in the future. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept samples from

 

40

the state, and it is possible that other states currently have such requirements or will have such requirements in the future.

If we were to lose our CLIA certificate of accreditation or California license, whether as a result of a revocation, suspension or limitation, we would no longer be able to sell our testing products, which would limit our revenue and harm our business. If we were to lose our license or fail to obtain or maintain NYDOH approval for our laboratory developed tests in New York or if we were to lose our license in other states where we are required to hold licenses, we would not be able to test samples from those states which would limit our revenue.

If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

We are also subject to healthcare fraud and abuse regulation by both the federal government and the states in which we conduct our business and to similar foreign laws and regulations in the countries where we conduct our business. These laws include, without limitation, state and federal anti-kickback, self-referral, fraud and abuse, false claims, and transparency laws and regulations with respect to payments and other transfers of value made to physicians and other licensed health care professionals.

The AKS prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving 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 purchasing, leasing, ordering or arranging for the purchase, lease or order of any good, facility, item or service, including laboratory services, reimbursable, in whole or in part, under Medicare, Medicaid or other federally financed healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. The AKS has been interpreted to apply to arrangements between manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Our practices may not in all cases meet all of the criteria for safe harbor protection from anti-kickback liability. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor, however, does not make the conduct per se illegal under the AKS. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the AKS has been violated. Further, 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.

On June 25, 2014, the OIG released a Special Fraud Alert, expressing concern regarding laboratory payments made to referring physicians and physician group practices for blood sample collection, processing, and packaging. Specifically, the OIG expressed concern that such arrangements may implicate the AKS when laboratories make payments to physicians for services that are already covered and reimbursed by Medicare, or are not commercially reasonable or exceed fair market value, all in order to induce physicians to order tests from such laboratory. Because the choice of laboratory and the decision to order laboratory tests is made or strongly influenced by the physician, with little or no input from patients, such payment may induce physicians to order more laboratory tests than are medically necessary, particularly when the payments are tied to, or take into account, the volume or value of business generated by the physician. To the extent our arrangements with physicians and pathology medical groups for services related to sample collection, transporting and handling are found to be inconsistent with applicable laws, we may be subject to significant penalties, including criminal penalties, and exclusion from participation in U.S. federal or state health care programs.

 

41

We are also subject to the federal physician self-referral prohibitions, commonly known as the Stark Law, which prohibits, among other things, physicians who have a financial relationship, including an investment, ownership or compensation relationship with an entity, from referring Medicare patients for designated health services, which include clinical laboratory services, unless an exception applies. Similarly, entities may not bill Medicare or any other party for services furnished pursuant to a prohibited referral. In addition, the government may assert that a claim including items or services resulting from a violation of the Stark Law constitutes a false or fraudulent claim for purposes of the false claims laws.

The federal civil and criminal false claims law, including the False Claims Act, prohibit, among other things, any person from knowingly presenting or causing to be presented a false claim for payment to the federal government, or knowingly making or causing to be made a false statement to get a false or fraudulent claim paid by the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. In addition, the government may assert that a claim for items or services arising from a violation of the AKS or Stark Law constitutes a false or fraudulent claim for purposes of the false claims laws. Private individuals also have the ability to bring actions under these false claims laws in the name of the government alleging false and fraudulent claims presented to or paid by the government (or other violations of the statutes) and to share in any amounts paid by the entity to the government in fines or settlement. Such suits, known as qui tam actions, are pervasive in the healthcare industry.

HIPAA also established federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the AKS, 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.

In addition, under the federal civil monetary penalties statute, a person is prohibited from offering or transferring to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the AKS and civil False Claims Act. One of the statutory exceptions to the prohibition is non-routine, unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable collection efforts. The OIG emphasizes, however, that this exception should only be used occasionally to address special financial needs of a particular patient. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copayments and deductibles offered to patients covered by commercial payors may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. To the extent our patient assistance programs are found to be inconsistent with applicable laws, we may be required to restructure or discontinue such programs, or be subject to other significant penalties.

Under the Physician Payments Sunshine Act, manufacturers of certain devices, drugs and biologics are required to report to CMS certain payments and transfers of value by them and in some cases their distributors to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other health care providers beginning in 2022, and teaching hospitals, as well as ownership and investment interests held by physicians (as defined by the statute) and their immediate family members. Because we currently manufacture our own LDTs solely for use by or within our own

 

42

laboratory, we believe that we are currently exempt from these reporting requirements. We cannot assure, however, that our regulators, principally the federal government, will agree with our determination, and a determination that we have violated these laws and regulations, or a public announcement that we are being investigated for possible violations, could adversely affect our business, prospects, results of operations or financial condition.

Several states in which we operate have also adopted similar fraud and abuse laws as described above. The scope of these laws and the interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Some state fraud and abuse laws apply to items or services reimbursed by any payor, including patients and commercial insurers, not just those reimbursed by a federally funded healthcare program.

It is possible that some of our business activities could be subject to challenge under one or more of such laws. Such a challenge, regardless of the outcome, could have a material adverse effect on our business, business relationships, reputation, financial condition and results of operations. Although an effective compliance program can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, achieving and sustaining compliance with these laws may prove costly.

In October 2020, we received an anonymous complaint through our internal reporting hotline regarding certain sales and marketing programs and physician and other referral source arrangements. We conducted a thorough investigation with the assistance of outside counsel. In March 2021, we made a Reportable Event disclosure to our OIG monitor under the CIA, and in June 2021, we made preliminary disclosures to the OIG under the OIG’s Provider Self-Disclosure Protocol, disclosing these arrangements as potential violations of the AKS and Stark Law. Based on estimates of the total remuneration provided to potential referral sources under these arrangements, we recorded an accrual of $0.7 million for this matter as of December 31, 2020. Our review is ongoing and also includes a review of claims submitted for reimbursement to Federal health care programs for certain tests that may have lacked adequate documentation of medical necessity. We intend to cooperate with the OIG in its review of this matter. There can be no assurance that OIG will agree to resolve the matter for the estimated amount or that the OIG may not require a materially greater amount to resolve the matter.

If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to significant penalties, including administrative, civil and/or criminal penalties, damages, fines, disgorgement, individual imprisonment, exclusion from participation in U.S. federal or state health care programs, such as Medicare and Medicaid in the United States and similar programs outside the United States, a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could materially adversely affect our ability to operate our business and our financial results. See “Risk Factors—Risks Related to Our Business and Business Strategy—Compliance with the terms and conditions of our Corporate Integrity Agreement requires significant resources and, if we fail to comply, we could be subject to monetary penalties and/or excluded from participation in government healthcare programs, which could harm our results of operations, liquidity and financial condition.” To the extent that any of our testing products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. For instance, many member states in the EU have adopted specific anti-gift statutes that further limit commercial practices for medical devices (including in vitro diagnostic medical devices), in particular vis-à-vis healthcare professionals and organizations.

 

43

Additionally, there has been a recent trend of increased regulation of payments and transfers of value provided to healthcare professionals or entities. In addition, many EU member states have adopted national “Sunshine Acts” which impose reporting and transparency requirements (often on an annual basis), similar to the requirements in the United States, on medical device manufacturers.

Our products and operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could harm our business.

Our products are in vitro tests, which are regulated as medical devices in the United States and other jurisdictions. Specifically, medical devices and their manufacturers and product developers are subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. The FDA and foreign regulatory agencies regulate, among other things, with respect to medical devices: design, development and manufacturing; testing, labeling, content and language of instructions for use and storage; clinical trials (to the extent applicable, clinical trials encompass the notion of clinical investigations in the EU); product safety; establishment registration and device listing; marketing, sales and distribution; premarket clearance, classification, approval, and certification; recordkeeping procedures; advertising and promotion; recalls and field safety corrective actions; post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; post-market studies; and product import and export.

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. The FDA and its foreign counterparts enforce its regulatory requirements through, among other means, periodic unannounced inspections. We do not know whether we or any contract manufacturers or suppliers that we utilize will be found compliant in connection with any future FDA or foreign inspections. Failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters; fines; injunctions; civil penalties; termination of distribution; recalls or seizures of products; delays in the introduction of products into the market; total or partial suspension of production; refusal to grant future marketing authorizations or certifications; withdrawals or suspensions of current marketing authorizations and certifications, resulting in prohibitions on sales of our products; and in the most serious cases, criminal penalties.

We may not receive, or may be delayed in receiving, any necessary marketing authorizations or certifications for our products, which could have a material adverse effect on our business.

In the United States, before we can market a new medical device, including a new in vitro diagnostic product, or a new use of, or other significant modification to an existing, marketed medical device, we must first receive either clearance under Section 510(k) of the FDCA approval of a premarket approval application, or PMA, or grant of a de novo classification request from the FDA, unless an exemption applies. We have obtained 510(k) clearance for our MammaPrint product for the examination of formalin-fixed paraffin embedded, or FFPE, breast cancer tissue samples to assess a patient’s risk for distant metastasis within five years.

In the 510(k) clearance process, before a device may be marketed in the United States, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (pre-amendments device), a device that was originally on the U.S. market pursuant to an approved PMA and later down-classified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the

 

44

predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the process of obtaining PMA approval, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices. In the de novo classification process, a manufacturer whose novel device under the FDCA would otherwise be automatically classified as Class III and require the submission and approval of a PMA prior to marketing is able to request down-classification of the device to Class I or Class II on the basis that the device presents a low or moderate risk. If the FDA grants the de novo classification request, the applicant will receive authorization to market the device. In the United States, this device type may be used subsequently as a predicate device for future 510(k) submissions.

The PMA approval, 510(k) clearance and de novo classification processes can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can take longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Clinical data may also be required in connection with an application for 510(k) clearance or a de novo request. Despite the time, effort and cost, a device may not obtain marketing authorization in the United States by the FDA. Any delay or failure to obtain necessary regulatory marketing authorizations could harm our business. Furthermore, even if we are granted such marketing authorizations, they may include significant limitations on the indicated uses for the device, which may limit the potential commercial market for the device.

In the United States, any modification to a product for which we have received marketing authorization may require us to submit a new 510(k) premarket notification and obtain clearance, to submit a PMA and obtain FDA approval, or to submit a de novo request prior to implementing the change. For example, any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, generally requires a new 510(k) clearance or other marketing authorization. The FDA requires every manufacturer to make such determinations in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with a manufacturer’s decisions regarding whether new marketing authorizations in the United States are necessary. If we obtain marketing authorizations from the FDA, we may make modifications or add additional features in the future that we believe do not require a new 510(k) clearance, de novo request or approval of a PMA. If the FDA disagrees with our determination and requires us to seek new marketing authorizations for the modifications for which we have concluded that new marketing authorizations in the United States are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain such marketing authorization, and we may be subject to significant regulatory fines or penalties. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could adversely affect our business.

The FDA, other foreign regulatory authorities and notified bodies can delay, limit or deny marketing authorization or certification of a device for many reasons, including:

 

•

our inability to demonstrate to the satisfaction of the FDA or the applicable regulatory entity or notified body that our products are substantially equivalent to a predicate device or are safe and effective for their intended uses;

 

45

•

the disagreement of the FDA or the applicable foreign regulatory body with the design or implementation of our clinical trials or the interpretation of data from preclinical studies or clinical trials;

 

•

serious and unexpected adverse device effects experienced by participants in our clinical trials;

 

•

the data from our clinical trials may be insufficient to support clearance, de novo classification, approval or certification, where required;

 

•

our inability to demonstrate that the clinical and other benefits of the product outweigh the risks;

 

•

the manufacturing process or facilities we use may not meet applicable requirements; and

 

•

the potential for policies or regulations of the FDA or applicable foreign regulatory bodies to change significantly in a manner rendering our clinical data or regulatory filings insufficient for new marketing authorizations or certifications.

In order to sell our products in EU member states, our products must comply with the essential requirements of the EU In Vitro Diagnostic Medical Devices Directive (Directive 98/79/EC), or IVDD. Compliance with these requirements is a prerequisite to be able to affix the European Conformity, or CE, mark to our products, without which they cannot be sold or marketed in the EU. All medical devices placed on the market in the EU must meet the essential requirements laid down in Annex I to the IVDD including the requirement that an in vitro diagnostic medical device must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performances intended by the manufacturer and be designed, manufactured, and packaged in a suitable manner. The European Commission has adopted various standards applicable to medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory, compliance with these standards is viewed as the easiest way to satisfy the essential requirements as a practical matter as it creates a rebuttable presumption that the device satisfies that essential requirement. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its (risk) classification. As a general rule, demonstration of conformity of in vitro diagnostic medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence.

Except for (general) in vitro diagnostic medical devices, where the manufacturer can self-declare the conformity of its products with the essential requirements of the IVDD, a conformity assessment procedure requires the intervention of a notified body. Notified bodies are independent organizations designated by EU member states to assess the conformity of devices before being placed on the market. The notified body would typically audit and examine the product’s technical file and the manufacturer’s quality system (notified body must presume that quality systems which implement the relevant harmonized standards—which is ISO 13485:2016 for Quality Management Systems—conform to these requirements). If satisfied that the relevant product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the CE-Mark to the device, which allows the device to be placed on the market throughout the EU.

 

46

If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the CE mark to our products, which would prevent us from selling them within the EU. In the EU, we must inform the notified body that carried out the conformity assessment of the devices that we market or sell in the EU and EEA of any planned substantial changes to our quality system or substantial changes to our in vitro diagnostic medical devices that could affect compliance with the essential requirements laid down in Annex I to the IVDD or cause a substantial change to the intended use for which the device has been CE marked. The notified body will then assess the planned changes and verify whether they affect the product’s ongoing conformity with the IVDD. If the assessment is favorable, the notified body will issue a new certificate of conformity or an addendum to the existing certificate attesting compliance with the essential requirements and quality system requirements laid down in the Annexes to the IVDD.

The aforementioned EU rules are generally applicable in the EEA (which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland). Non-compliance with the above requirements would also prevent us from selling our products in these three countries.

The EU regulatory landscape concerning medical devices is evolving and a new regulation governing in vitro diagnostic medical devices will become applicable on May 26, 2022 (See –Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain marketing authorizations or certifications for any product candidate or to manufacture, market or distribute any product candidates after such authorizations have been obtained) and these modifications may have an effect on the way we conduct our business in the EU and the EEA.

The FDA may modify its enforcement discretion policy with respect to laboratory developed tests, or LDTs, in a risk-based manner, and we may become subject to extensive regulatory requirements and may be required to conduct additional clinical trials prior to continuing to sell our existing tests or launching any other tests in the United States we may develop, which may increase the cost of conducting, or otherwise harm, our business.

We currently market certain of our in vitro testing products, including BluePrint, in the United States as LDTs and are developing additional tests that we plan to market as LDTs. LDTs are in vitro 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 the FDA has statutory authority to ensure that medical devices are safe and effective for their intended uses, the FDA has historically exercised enforcement discretion and has not enforced certain applicable FDA requirements, including premarket review, with respect to LDTs. In addition, in August 2020, HHS announced that the FDA will not require premarket review of LDTs absent notice-and-comment rulemaking. Although the Biden administration has not taken affirmative steps to rescind this August 2020 announcement issued by the previous administration, this 2020 policy statement is no longer posted on the HHS website.

Legislative and administrative proposals proposing to amend the FDA’s oversight of LDTs have been introduced in recent years and we expect that new legislative and administrative proposals will continue to be introduced from time to time. It is possible that legislation could be enacted into law or regulations or guidance could be issued by the FDA which may result in new or increased regulatory requirements for us to continue to offer our LDTs or to develop and introduce new tests as LDTs in the United States.

For example, the FDA could modify its current approach to LDTs in a way that would subject our tests that we market in the United States as LDTs to the enforcement of additional regulatory requirements. In recent years, the FDA has stated its intention to modify its enforcement discretion policy with respect to LDTs. Specifically, on July 31, 2014, the 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, the FDA issued two draft guidance documents entitled “Framework for Regulatory

 

47

Oversight of Laboratory Developed Tests (LDTs),” or the Framework Guidance, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)”. The 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.

In addition, the FDA and Congress have, for over the past decade, considered a number of proposals to end the FDA’s enforcement discretion policy for LDTs and subject LDTs to additional regulatory requirements. For example, Congress has recently worked on legislation to create an LDT and in vitro diagnostic regulatory framework for all in vitro clinical tests that would be separate and distinct from the existing medical device regulatory framework. In June 2021, members of the U.S. House of Representatives formally introduced the VALID Act (Verifying Accurate Leading-edge IVCT Development Act of 2021) and an identical version of the bill was introduced in the U.S. Senate. If passed in its current form, the VALID Act would create a new category of medical products separate from medical devices called “in vitro clinical tests,” or IVCTs, and bring all such products within the scope of FDA’s oversight. The VALID Act appears to contemplate that traditional LDTs would become subject to FDA regulation as IVCTs, and that all IVCTs would be categorized as either high-risk or low-risk, distinct from FDA’s existing classification for medical devices into Class I, Class II, or Class III. As proposed, the risk classification for an IVCT would depend on certain factors, including the risk to the patient or public health of an inaccurate result, the extent to which, the test is well-understood and/or how well-characterized it is, the clinical circumstances under which the test is used, and the availability of other tests and any mitigating measures. Depending on the risk classification, new IVCTs, or certain modifications to existing IVCTs, could be subject to premarket review. Notably, the bill currently includes a provision that would “grandfather” certain tests that were commercialized before the enactment of the legislation, subject to certain requirements. It is unclear whether the VALID Act or any other legislative proposals would be passed by Congress or signed into law by the President.

Even if the FDA does not modify its policy of enforcement discretion, whether due to changes in FDA policy or legislative action, the FDA may disagree that we are marketing our LDTs in the United States within the scope of its policy of enforcement discretion and may impose significant regulatory requirements, including the requirement for premarket review and subsequent marketing authorization. We may also be required to conduct clinical studies to support our currently marketed products or planned product launches. If we are required to conduct such clinical trials, delays in the commencement or completion of clinical testing could significantly increase our test development costs and delay commercialization of any currently-marketed tests that we may be required to cease selling or the commercialization of any future tests that we may develop, which could harm our financial prospects.

Failure to comply with post-marketing regulatory requirements could subject us to enforcement actions, including substantial penalties, and might require us to recall or withdraw a product from the market.

Even though we have obtained 510(k) clearance for certain of our testing products in the United States and similar approval or certification abroad, we are subject to ongoing and pervasive regulatory requirements governing, among other things, the manufacture, marketing, advertising, medical device reporting, sale, promotion, import, export, registration, and listing of devices. For example, we must submit periodic reports to the FDA as a condition of our 510(k) clearances. These reports include information about failures and certain adverse events associated with the device after its clearance. Failure to submit such reports, or failure to submit the reports in a timely manner, could result in enforcement action by the FDA. Following its review of the periodic reports, the FDA might ask for additional information or initiate further investigation. In addition, any marketing authorizations we are granted are limited to the authorized indications for use. Further, the manufacturing facilities for a product are subject to periodic review and inspection. Subsequent discovery of problems with a

 

48

product, manufacturer, or manufacturing facility may result in restrictions on the product, manufacturer, or manufacturing facility, including withdrawal of the product from the market or other enforcement actions.

Regulatory changes could result in restrictions on our ability to continue or expand our operations, higher than anticipated costs, or lower than anticipated sales. Even after we have obtained the proper regulatory clearance or certification to market a device, we have ongoing responsibilities under FDA regulations and applicable foreign laws and regulations. The FDA, state and foreign regulatory authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state or foreign regulatory authorities or bodies, which may include any of the following sanctions:

 

•

untitled letters or warning letters;

 

•

fines, injunctions, consent decrees and civil penalties;

 

•

recalls, termination of distribution, administrative detention, or seizure of our products;

 

•

customer notifications or repair, replacement or refunds;

 

•

operating restrictions or partial suspension or total shutdown of production;

 

•

delays in or refusal to grant our requests for future clearances, de novo classifications or approvals or foreign marketing authorizations or certifications of new products, new intended uses, or modifications to existing products;

 

•

withdrawals or suspensions of our current 510(k) clearances or certifications, resulting in prohibitions on sales of our products;

 

•

FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

 

•

criminal prosecution.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition and results of operations. In addition, the FDA and foreign regulatory authorities may change their policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay marketing authorization or certification of our product candidates or impact our ability to modify our currently cleared and certified products on a timely basis. Such policy or regulatory changes could impose additional requirements upon us that could delay our ability to obtain new clearances, approvals or certifications, increase the costs of compliance or restrict our ability to maintain our clearances and certifications of our current products.

Our products must be manufactured in accordance with applicable laws and regulations, and we could be forced to recall our devices or terminate production if we fail to comply with these regulations.

In the United States, the methods used in, and the facilities used for, the manufacture of medical devices must comply with the FDA’s current good manufacturing practices, or cGMPs, for medical devices, known as the Quality System Regulation, or QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality

 

49

assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of medical devices. Furthermore, we will be required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality standards and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing 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.

In the EU, we are also required to demonstrate compliance with similar quality system requirements which are laid down in the relevant Annexes to the IVDD. Such compliance can be supported by, among other things, a certificate of compliance with ISO 13485:2016. Demonstration of compliance with the ISO 13485:2016 standard permits manufacturers to benefit from a presumption of conformity with the corresponding quality system requirements laid down in such Annexes to the IVDD.

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 and foreign 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; the FDA’s or foreign regulatory authorities’ or notified body’s refusal to grant pending or future marketing authorizations or certifications for our product candidates; 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.

Our products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we may be required to report to the FDA or foreign regulatory bodies, and if we fail to do so, we may 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 the FDA or another governmental authority, could have a negative impact on us.

We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA or foreign regulatory bodies 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, the FDA or foreign regulatory bodies could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of marketing authorizations or certifications, seizure of our products or delay in granting marketing authorizations or certifications for any of our product candidates.

 

50

The 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. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the product 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, the FDA or foreign regulatory authorities or bodies may require, or we may decide, that we will need to obtain new marketing authorizations or certifications for the product before we may market or distribute the corrected product. Seeking such marketing authorizations or certifications may delay our ability to replace the recalled products in a timely manner. Moreover, if we do not adequately address problems associated with our products, we may face additional regulatory enforcement action, including FDA or foreign regulatory authorities’ 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 the FDA or foreign regulatory authorities. We may initiate voluntary withdrawals or corrections for our products in the future that we determine do not require notification of the FDA or foreign regulatory authorities. If the FDA or foreign regulatory authorities disagree 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.

The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

Any marketing authorization or certification we may receive for our products will be limited to specified indications for use as well as any special conditions for use specified in the authorization or certification. For example, in the U.S., our MammaPrint is currently cleared to be performed in a central laboratory, using the gene expression profile obtained from FFPE breast cancer tissue samples to assess a patient’s risk for distant metastasis within five years, and may only be performed in breast cancer patients, with Stage I or Stage II disease, with tumor size £ 5.0 cm and lymph node negative. The MammaPrint FFPE result is indicated for use by physicians as a prognostic marker only, along with other clinicopathological factors. The FDA has also included special conditions for use in our 510(k) clearance, stating that MammaPrint FFPE is not indicated as a standalone test to determine the outcome of disease, nor to suggest or infer an individual patient’s likely response to therapy. While we train our marketing personnel and direct sales force to not promote our authorized tests for uses outside of the FDA-authorized indications for use or in a manner inconsistent with FDA’s special conditions for use statements included in our 510(k) clearance, known as “off-label uses,” we cannot assure you that no off-label promotion has occurred. If the government finds that we promoted MammaPrint for a commercial use in the United States to suggest or infer an individual patient’s response to a therapy, or to predict a patient’s outcome, then the government may take enforcement action against us for off-label promotion, which could also expose us to potential civil and criminal

 

51

liability under the federal False Claims Act. If the FDA or any foreign regulatory body determines that our promotional materials, sales programs, or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

Additionally, we cannot prevent a physician from using our products off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. As described above, product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.

If we do not obtain and maintain any required international regulatory registrations and marketing authorizations or certifications for our products, we will be unable to market and sell such products outside of the United States.

Sales of our products outside of the United States will remain subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. While the regulations of some countries may not impose significant barriers to marketing and selling our products or only require notification to regulators or third parties, others require that we obtain affirmative marketing authorization from a specified regulatory body. Complying with foreign regulatory requirements, including obtaining registrations, marketing authorizations or certifications, can be expensive and time-consuming, and we may not receive necessary marketing authorizations in each country in which we plan to market our products or we may be unable to do so on a timely basis. The time required to obtain registrations and marketing authorizations, if required by other countries, may be longer than that required for FDA marketing authorizations, and requirements for such registrations or authorizations may significantly differ from FDA requirements. If we modify our products, we may need to apply for additional marketing authorizations before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we have received. If we are unable to maintain our marketing authorizations in a particular country, we will no longer be able to sell the applicable product in that country.

Obtaining marketing authorization in the United States from the FDA does not ensure similar marketing authorization or certification by regulatory authorities or notified bodies in other countries, and registration, marketing authorization or certification by one or more foreign regulatory authorities or notified bodies does not ensure registration, marketing authorization, or certification by regulatory authorities or notified bodies in other foreign countries or by the FDA. However, a failure or delay in obtaining registration, marketing authorization or certification in one country may have a negative effect on the regulatory process in others.

 

52

Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain marketing authorizations or certifications for any product candidate or to manufacture, market or distribute any product candidates after such authorizations have been obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices. In addition, the FDA may change its policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay marketing authorization in the United States of our future products under development or impact our ability to modify any products for which we have already obtained marketing authorizations on a timely basis. Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. For example, in November 2018, FDA officials announced steps that the FDA intended to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. Among other things, the FDA announced that it planned to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals included plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than ten years old. These proposals have not yet been finalized or adopted, although the FDA may work with Congress to implement such proposals through legislation. Accordingly, it is unclear the extent to which any proposals, if adopted, could impose additional regulatory requirements on us that could delay our ability to obtain 510(k) clearances in the future, increase the costs of compliance, or restrict our ability to maintain any marketing authorizations that we may obtain, or otherwise create competition that may negatively affect our business.

More recently, in September 2019, the FDA issued revised final guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA maintains a list of device types appropriate for the “safety and performance based” pathway and continues to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as recommended testing methods, where feasible. The FDA may establish performance criteria for classes of devices similar to ours, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain marketing authorization or otherwise create competition that may negatively affect our business.

In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any product candidates or make it more difficult to obtain marketing authorizations for, manufacture, market or distribute any product candidate we are developing. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require: additional testing prior to seeking marketing authorization, changes to manufacturing methods recalls, replacement or discontinuance of our products; or additional record keeping.

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be promulgated that could prevent, limit or delay marketing authorization of any product candidates we develop. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may be subject to enforcement action and we may not achieve or sustain profitability.

 

53

The EU regulatory landscape concerning medical devices is evolving. On April 5, 2017 Regulation (EU) 2017/746 of the European Parliament and of the Council on in vitro diagnostic medical devices and repealing Directive 98/79/EC and Commission Decision 2010/227/EU, or the IVDR, was adopted to establish a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. Unlike directives, the IVDR does not need to be transposed into national law and therefore reduces the risk of discrepancies in interpretation across the different European markets.

The IVDR will become applicable five years after publication (on May 26, 2022). Once applicable, the IVDR will among other things:

 

•

strengthen the rules on placing devices on the market and reinforce surveillance once they are available;

 

•

establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;

 

•

establish explicit provisions on importers’ and distributors’ obligations and responsibilities;

 

•

impose an obligation to identify a responsible person who is ultimately responsible for all aspects of compliance with the requirements of the new regulation;

 

•

improve the traceability of medical devices throughout the supply chain to the end-user or patient through the introduction of a unique identification number, to increase the ability of manufacturers and regulatory authorities to trace specific devices through the supply chain and to facilitate the prompt and efficient recall of medical devices that have been found to present a safety risk;

 

•

set up a central database (Eudamed) to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and

 

•

strengthen rules for the assessment of certain high-risk devices that may have to undergo an additional check by experts before they are placed on the market.

These modifications may have an effect on the way we conduct our business in the EEA.

Our business is subject to a variety of U.S. and foreign laws and regulations involving export controls and economic sanctions; our failure to comply with these laws and regulations could harm our business or our operating results.

We are or may become subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including laws and regulations regarding anti-bribery and anti-corruption, economic or other trade prohibitions or sanctions. The global nature of our business operations also creates various domestic and foreign regulatory challenges and our products are also subject to U.S. export controls, including the U.S. Department of Commerce’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls. If we become liable under these laws or regulations, we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain products or services, which would negatively affect our business, financial condition, and operating results. In addition, the increased attention focused upon liability issues as a result of lawsuits, regulatory proceedings, and legislative proposals could harm our brand or otherwise impact the growth of our business. Any costs incurred as a result of compliance or other liabilities under these laws or regulations could harm our business and operating results.

 

54

Changes in funding for, or disruptions caused by global health concerns impacting, the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new medical device products from being developed, authorized or commercialized in a timely manner, which could negatively impact our business.

The ability of the FDA, foreign regulatory agencies and notified bodies to review, authorize and certify the sale of new products can be affected by a variety of factors, including government budget and funding levels; its ability to hire and retain key personnel and accept the payment of user fees; statutory, regulatory, and policy changes; and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the FDA 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 the FDA and other agencies may also slow the time necessary for new devices, including in vitro diagnostics to be reviewed and/or authorized for marketing 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 the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone inspections of foreign manufacturing facilities and products, and on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The 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. Other regulatory authorities 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 the FDA, other regulatory authorities or notified bodies from conducting business as usual or conducting inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

For instance, in the EU, notified bodies must be officially designated to certify products and services in accordance with the IVDR. Only a few notified bodies have been designated so far but the COVID-19 pandemic has significantly slowed down their designation process. Without IVDR designation, notified bodies may not yet start certifying devices in accordance with the new Regulation. As only a few notified bodies have been IVDR-designated they are facing a heavy workload and their review times have lengthened. This situation could impact the way we are conducting our business in the EU and the EEA.

The clinical trial process can be lengthy and expensive with uncertain outcomes. Results of earlier studies may not be predictive of future clinical trial results.

We have conducted, and in the future may conduct, sponsor or collaborate with third parties to conduct or sponsor, clinical studies or trials, including studies and trials designed to support marketing authorizations for our products and product candidates. Clinical testing is difficult to design and implement, can take many years, can be expensive and carries uncertain outcomes. The results of nonclinical studies and clinical trials of our products conducted to date and ongoing or future studies and trials of our current, planned or future products may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. The data and results from our clinical trials does not ensure that we will achieve similar results in future clinical trials. In

 

55

addition, nonclinical and clinical data are often susceptible to various interpretations and analyses, and many companies that have believed their products performed satisfactorily in preclinical studies and earlier clinical trials have nonetheless failed to replicate results in later clinical trials, or have viewed such data in different ways than regulators do. Failure can occur at any stage of clinical testing. Clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and nonclinical testing in addition to those we have planned before we are able to seek marketing authorizations for our products or product candidates.

The initiation and completion of clinical studies may be prevented, delayed, or halted for numerous reasons. We may experience delays in our clinical trials for a number of reasons, which could adversely affect the costs, timing or successful completion of such clinical trials, including related to the following:

 

•

we may be required to submit an investigational device exemption application, or IDE, to the FDA, which must become effective prior to commencing certain human clinical trials of medical devices, and the FDA may reject our IDE application and notify us that we may not begin clinical trials, or place restrictions on the conduct of such trials; similar requirements may apply in foreign jurisdictions;

 

•

regulators and other comparable foreign regulatory authorities may disagree as to the design or implementation of our clinical trials;

 

•

regulators and/or institutional review boards, or IRBs, ethics committees or other reviewing bodies may not authorize us or our investigators to commence a clinical trial, or to conduct or continue a clinical trial at a prospective or specific trial site;

 

•

CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

•

clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;

 

•

the number of subjects or patients required for clinical trials may be larger than we anticipate, enrollment in these clinical trials may be insufficient or slower than we anticipate, and the number of clinical trials being conducted at any given time may be high and result in fewer available patients for any given clinical trial, or patients may drop out of these clinical trials at a higher rate than we anticipate;

 

•

our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

•

we might have to suspend or terminate clinical trials for various reasons, including safety issues, unacceptable error rates or other findings that could lead to unacceptable health risks;

 

•

we may have to amend clinical trial protocols or conduct additional studies to reflect changes in regulatory requirements or guidance, which we may be required to submit to an IRB or ethics committees and/or regulatory authorities for re-examination;

 

•

regulators, IRBs, or other parties may require or recommend that we or our investigators suspend or terminate clinical research for various reasons, including safety signals or noncompliance with regulatory requirements;

 

•

the cost of clinical trials may be greater than we anticipate;

 

56

•

clinical sites may not adhere to the clinical protocol or may drop out of a clinical trial;

 

•

we may be unable to recruit a sufficient number of clinical trial sites;

 

•

regulators, IRBs, or other reviewing bodies may fail to approve or subsequently find fault with our manufacturing processes or facilities of third-party manufacturers with which we enter into agreement for clinical and commercial supplies, the supply of materials necessary to conduct clinical trials may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply; and

 

•

policies or regulations of FDA or applicable foreign regulatory agencies may change in a manner rendering our clinical data insufficient for seeking or obtaining marketing authorizations or certifications.

Any of these occurrences may significantly harm our business, financial condition and prospects.

Patient enrollment in clinical trials and completion of patient follow-up depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the eligibility criteria for the clinical trial, patient compliance, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product being studied in relation to other available products. In addition, patients participating in our clinical trials may drop out before completion of the trial or experience adverse medical events unrelated to our products. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may delay commencement or completion of the clinical trial, cause an increase in the costs of the clinical trial and delays, or result in the failure of the clinical trial.

Clinical trials must be conducted in accordance with the laws and regulations of the FDA and other applicable regulatory authorities’ legal requirements, regulations or guidelines, and are subject to oversight by these governmental agencies and IRBs or ethics committees at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with supplies of our devices produced under cGMP and other regulations. Furthermore, we rely on CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials and while we have agreements governing their committed activities, we have limited influence over their actual performance. We depend on our collaborators and on medical institutions and CROs to conduct our clinical trials in compliance with good clinical practice, or 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 standards 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 or both. In addition, conducting clinical trials in various countries may subject us to further delays and expenses as a result of increased shipment costs, additional regulatory requirements and the engagement of non-U.S. CROs and other third party contractors, as well as expose us to risks associated with clinical investigators who are unknown to the FDA, and different standards of diagnosis, screening and medical care.

Our business is subject to a variety of U.S. and foreign laws and regulations involving export controls and economic sanctions; our failure to comply with these laws and regulations could harm our business or our operating results.

We are or may become subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including laws and regulations regarding anti-bribery and anti-corruption, economic or other trade prohibitions or sanctions. The global nature of our business operations also creates various domestic and foreign regulatory challenges and our products are also subject to U.S. export controls, including the U.S. Department of Commerce’s Export

 

57

Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls. If we become liable under these laws or regulations, we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain products or services, which would negatively affect our business, financial condition, and operating results. In addition, the increased attention focused upon liability issues as a result of lawsuits, regulatory proceedings, and legislative proposals could harm our brand or otherwise impact the growth of our business. Any costs incurred as a result of compliance or other liabilities under these laws or regulations could harm our business and operating results.

Risks Related to Our Reliance on Third Parties

We rely on a limited number of third-party suppliers and, in some cases, sole suppliers, for the majority of our reagents and microarrays, laboratory instruments and materials used in running our tests and in the NGS Kits sold to certified labs and may not be able to find replacements or immediately transition to alternative suppliers.

We rely on several sole suppliers, including Agilent Technologies, Illumina and Takara, to supply certain reagents and microarrays used in processing patient samples, and to service some of the laboratory systems on which we perform our tests. For us to be successful, our suppliers must be able to provide us with reagents, microarrays, laboratory instruments and materials in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis. We believe that there are relatively few equipment suppliers that are currently capable of supplying such materials and servicing the equipment necessary for our tests.

While we have developed alternate sourcing strategies for these materials and services, we cannot be certain that these strategies will be effective. If we should encounter delays or difficulties in securing these materials or services, if the materials or services do not meet our quality specifications, or if we cannot obtain acceptable substitute materials or services, an interruption in test processing could occur. Any such interruption may significantly affect future product revenue.

Additionally, if any change in manufacturer results in a significant change to any product after receipt of marketing authorization or certification, a new 510(k) clearance from the FDA or similar international regulatory authorization or certification may be necessary before we implement the change, which could cause substantial delays.

We currently rely, and plan to rely in the future, on third parties to conduct and support clinical trials involving our products and product candidates. If these third parties do not properly and successfully carry out their contractual duties or meet expected deadlines, our business may be harmed.

We have utilized and plan to continue to utilize and depend upon independent investigators and collaborators, such as medical institutions, CROs, contract manufacturing organizations, or CMOs, and strategic partners to conduct and support our clinical trials under agreements with us. We expect to have to negotiate budgets and contracts with CROs, trial sites and CMOs and we may not be able to do so on favorable terms, which may result in delays to our development timelines and increased costs. We will rely heavily on these third parties over the course of our clinical trials, and we control only certain aspects of their activities. As a result, we will have less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal and regulatory requirements and scientific standards, and our reliance on third parties does not

 

58

relieve us of our regulatory responsibilities. We and these third parties are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for products and product candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators and trial sites.

If we or any of these third parties fail to comply with applicable GCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities or bodies may require us to perform additional clinical trials before approving our marketing applications or request for certification. We cannot assure that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the GCP regulations. In addition, certain of our products must be produced in accordance with the QSR. Our failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the marketing authorization process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy, data protection and security laws.

Any third parties conducting our clinical trials will not be our employees and, except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our products and products or product candidates. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other product development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain any required marketing authorizations for or successfully commercialize our products or product candidates. As a result, our financial results and the commercial prospects for our products or product candidates would be adversely affected, our costs could increase and our ability to generate revenue could be delayed.

Switching or adding third parties to conduct our clinical trials involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.

Risks Related to Product Development, Commercialization and Sales of our Products

We have finite resources, which may restrict our success in commercializing our products, and we may be unsuccessful in entering into or maintaining third-party arrangements to support our internal efforts.

To grow our business as planned, we must expand our sales, marketing and customer support capabilities, which will involve developing and administering our commercial infrastructure and/or collaborative commercial arrangements and partnerships. We must also maintain satisfactory arrangements for the manufacture and distribution of our tests. Also, we operate CLIA-certified lab facilities to process our tests and provide patient results.

We have limited experience managing a sales force, customer support operation and operating manufacturing and clinical laboratory operations for multiple products in multiple locations with divergent regulatory requirements. We may encounter difficulties retaining and managing the specialized workforce these activities require. We may seek to partner with others to assist us with any or all of these functions. However, we may be unable to find appropriate third parties with whom to enter into these arrangements.

 

59

Our sales efforts have grown in size and complexity. We must coordinate among our internal sales teams, as well as with distributors and laboratory partners, to ensure that we are effectively and compliantly marketing our tests.

If we are unable to deploy and maintain effective sales, marketing and medical affairs capabilities, we will have difficulty achieving market awareness and selling our products and services.

To achieve commercial success for our MammaPrint and BluePrint tests and our future products and services, we must continue to develop and grow our sales, marketing and medical affairs organizations to effectively explain to healthcare providers the reliability, effectiveness and benefits of our current and future products and services as compared to alternatives. We may not be able to successfully manage our dispersed or inside sales forces or our sales force may not be effective. Because of the competition for their services, we may be unable to hire, partner with or retain additional qualified sales representatives or marketing or medical affairs personnel, either as our employees or independent contractors or through independent sales or other third-party organizations. Market competition for commercial, marketing and medical affairs talent is significant, and we may not be able to hire or retain such talent on commercially reasonable terms, if at all.

Establishing and maintaining sales, marketing and medical affairs capabilities will be expensive and time-consuming. Our expenses associated with maintaining our sales force may be disproportional compared to the revenue we may be able to generate on sales of our tests or any future products or services.

The success of our tests and any other screening or diagnostic product or service we may offer or develop will depend on the degree of market acceptance by healthcare providers, patients, healthcare payors and others in the medical community.

Our products and services may not gain market acceptance by healthcare providers, healthcare payors and others in the medical community. The degree of market acceptance of tests and other products and services that we may offer will depend on a number of factors, including:

 

•

demonstrated performance and utility;

 

•

price;

 

•

the availability and attractiveness of alternative tests;

 

•

the willingness of healthcare providers to prescribe our products and services;

 

•

the ease of use of our ordering process for healthcare providers; and

 

•

adequate third-party coverage or reimbursement.

Our assumptions regarding the market opportunity for our products or services may not prove true.

Recommendations and guidelines issued by various organizations may significantly affect payers’ willingness to cover, and healthcare providers’ willingness to prescribe, our products.

Securing influential recommendations and inclusion in healthcare guidelines is important to our healthcare provider and payer engagement strategies. Clinical guidelines, such as those promulgated by the National Comprehensive Cancer Network can be influential with physicians and payors, and generally can serve to accelerate market acceptance and reimbursement for products and services endorsed by these guidelines. If we are unsuccessful in maintaining and increasing the level of recommendation for our tests within recommendations and guidelines, or if any new genomic tests we develop are not included in these guidelines, we may be at a disadvantage in gaining market acceptance for our products.

 

60

We expect to make significant investments to research and develop new breast cancer tests, which may not be successful.

We are seeking to increase our tests’ utility by adding new biomarkers and to develop a pipeline for future products. We expect to incur significant expenses on these development efforts, but they may not be successful.

Developing new or improved cancer tests is a speculative and risky endeavor. Product candidates that may initially show promise may fail to achieve the desired results in larger clinical studies or may not achieve acceptable levels of clinical accuracy. Results from early studies or trials are not necessarily predictive of future clinical trial results, and interim results of a trial are not necessarily indicative of final results. From time to time, we may publicly disclose then-available data from 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. As a result, such data should be viewed with caution until the final data are available. Additionally, such data from 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.

Any cancer screening test we develop will need to demonstrate in clinical studies a high level of accuracy. Because cancer screening tests seek to identify relatively rare occurrences, if in a clinical study a product candidate fails to identify even a small number of cancer cases, the sensitivity rate may be materially and adversely affected and we may have to abandon the candidate product or service. Any cancer test we develop will need to address an unmet medical need with accurate performance and utility. There can be no guarantee that the FDA or foreign regulatory authorities or notified bodies would clear, approve or certify any future product we may develop. Even if the FDA or foreign regulatory authorities or notified bodies clear, approve, or certify a new product we develop, we would need to commit substantial resources to commercialize, sell and market such product before it could be profitable, and the product may never be commercially viable. Additionally, development of any product may be disrupted or made less viable by the development of competing products.

If we determine that any of our current or future development programs is unlikely to succeed, we may abandon it without any return on our investment into the program. We may need to raise significant additional capital to bring any new products to market, which may not be available on acceptable terms, if at all.

New solution development involves a lengthy and complex process, and we may be unable to commercialize on a timely basis, or at all, any new tests we may develop.

We have tests in development and devote considerable resources to research and development. There can be no assurance that our new tests or versions of our current tests will be capable of reliably predicting the recurrence of cancers with the sensitivity and specificity necessary to be clinically useful and commercially viable. We also cannot be certain that the products we launch will attain use among the intended target of community oncologists and pathologists. In addition, before we can develop new tests and commercialize any new products, we will need to:

 

•

conduct substantial research and development;

 

•

conduct validation studies;

 

•

expend significant funds;

 

•

develop and scale our laboratory processes to accommodate different tests; and

 

61

•

develop and scale our infrastructure including our operational systems such as order-to-cash, supply chain, and inventory management, and customer service to establish and add new capabilities.

Our product development process involves a high degree of risk and may take several years. Our product development efforts may fail for many reasons, including:

 

•

failure of the product at the research or development stage;

 

•

difficulty in accessing tissue and blood samples;

 

•

challenges in timely patient enrollment in future clinical trials;

 

•

failure of a development partner; or

 

•

lack of clinical validation data to support the effectiveness of the product.

Few research and development projects result in commercial products, and success in early clinical trials often is not replicated in later studies. At any point, we may abandon development of a product candidate or we may be required to expend considerable resources repeating clinical trials, which would adversely impact the timing for generating potential revenue from those product candidates. If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we might choose to abandon the development of the product or product feature that was the subject of the clinical trial, which could harm our business. In addition, competitors may develop and commercialize competing products faster or more efficiently than we are able to do so.

If we are unable to develop solutions to keep pace with rapid technological, medical and scientific change, our operating results and competitive position could be harmed.

In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer including genetic screening, ctDNA/MRD testing, enhanced imaging systems, neoadjuvant and adjuvant therapeutics. These advances require us to continuously develop our technology, develop new products and enhance existing products to keep pace with evolving standards of care. Our tests could become obsolete unless we continually innovate and expand our products to demonstrate recurrence and treatment benefit in patients treated with new therapies. New treatment therapies typically have only a few years of clinical data associated with them, which limits our ability to perform clinical studies and correlate sets of genes to a new treatment’s effectiveness. Additionally, as new products are developed, evolving industry standards and metrics may slow the widespread adoption of any new products we may introduce. If we are unable to demonstrate the applicability of our tests to new treatments or to keep pace with new industry standards, sales of our test could decline, which would reduce our revenue.

Our research and development efforts will be hindered if we are not able to obtain samples, contract with third parties for access to samples or complete timely enrollment in future clinical trials.

Access to human sample types, such as blood, tissue, stool, or urine is necessary for our research and product development. Acquiring samples from individuals with clinical diagnoses or associated clinical outcomes through purchase or clinical studies is necessary. Lack of available samples can delay development timelines and increase costs of development. Generally, the agreements under which we gain access to human samples are non-exclusive. Other companies may compete with us for access. Additionally, the process of negotiating access to samples can be lengthy and it may involve numerous parties and approval levels to resolve complex issues such as usage rights, institutional

 

62

review board approval, privacy rights, publication rights, intellectual property ownership and research parameters. If we are not able to negotiate access to clinical samples with research institutions, hospitals, clinical partners, pharmaceutical companies, or companies developing therapeutics on a timely basis, or at all, or if other laboratories or our competitors secure access to these samples before us, our ability to research, develop and commercialize future products will be limited or delayed. Finally, we may not be able to conduct or complete clinical trials on a timely basis if we are not able to enroll sufficient numbers of patients in such trials, and our failure to do so could have an adverse effect on our research and development and product commercialization efforts.

If we are unable to support demand for our tests, including successfully managing the evolution of our technology and business systems, our business could suffer.

As our test volume grows and we examine additional means through which we can provide our tests, we will need to continue to ramp up our testing capacity, implement increases in scale and related processing, customer service, billing and systems process improvements, and expand our internal quality assurance program, technology and manufacturing platforms to support testing on a larger scale. We will also need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our tests. We cannot assure that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available. As additional products are commercialized, we will need to bring new equipment on-line, implement new systems, technology, controls and procedures and hire personnel with different qualifications. We cannot assure that any such efforts will not result in delays. Failure to implement necessary procedures, transition to new equipment or processes or to hire the necessary personnel could result in higher cost of processing or an inability to meet market demand. There can be no assurance that we will be able to perform tests on a timely basis at a level consistent with demand, that our efforts to scale our commercial operations will not negatively affect the quality of test results, or that we will be successful in responding to the growing complexity of our testing operations. If we encounter difficulty meeting market demand or quality standards for our tests, our reputation could be harmed and our future prospects and our business could suffer.

Risks Related to our Intellectual Property

If we are unable to obtain and maintain sufficient intellectual property protection for our technology, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours and our ability to successfully commercialize our products may be impaired.

We rely on patent protection as well as trademark, copyright, trade secret, know-how, and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us. In addition, we have incurred and may continue to incur substantial litigation costs in our attempts to maintain and defend the validity and enforceability of our intellectual property; and to enforce our intellectual property against unauthorized third-party use.

To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property is not sufficient to cover our competitors’ products and/or services, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time-consuming and expensive.

 

63

As is the case with other biotechnology companies, our success depends in large part, on our ability to obtain and maintain protection of the intellectual property that we own solely or jointly with or license from, others, particularly patents, in the United States and other countries with respect to our products and technologies. We apply for patents that seek to cover our products and technologies and uses thereof, as we deem appropriate. However, obtaining and enforcing biotechnology patents is costly, time-consuming and complex, and we may fail to apply for patents on important products, services and technologies in a timely fashion, or at all, or we may fail to apply for patents in potentially-relevant jurisdictions. We may not be able to file and prosecute all necessary or desirable patent applications. Moreover, we may not be able to maintain, enforce and license any patents that may issue from such patent applications, at a reasonable cost or in a timely manner. It is also possible that

we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We may not have the right to control the preparation, filing and prosecution of patent applications or to maintain the rights to patents licensed from or to third parties. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.

We own or license numerous U.S. patents and pending U.S. patent applications with international counterparts in certain countries. It is possible that our or our licensors’ pending patent applications will not result in issued patents in a timely fashion or at all, and even if patents are granted, they may not provide a basis for intellectual property protection of commercially viable products or services, may not provide us with any competitive advantages or may be challenged and invalidated by third parties. It is possible that others will design around our current or future patented technologies. Our owned or licensed patents or patent applications may be challenged by third parties in administrative proceedings and/or court proceedings. We may not be successful in defending any such challenges made against our owned or licensed patents or patent applications. Any successful third-party challenge to such patent rights could result in their unenforceability or invalidity and increased competition to our business. We may choose to challenge the patents or patent applications owned or licensed by third parties. The outcome of patent litigation or other administrative proceedings can be uncertain, and any attempt by us to enforce our patent rights against others, to defend our patent rights against a challenge by others, or to challenge the patent rights of others may not be successful, or, if successful, may take substantial time and result in substantial cost, and may divert our efforts and attention from other aspects of our business.

The patentability, enforceability and validity of patents in the life sciences are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding patent-eligible subject matter and the interpretation of claims in with respect to life science patents has emerged to date in the United States or elsewhere. Courts frequently render opinions in the biotechnology/life sciences field that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of our methods, materials and services. Our patents and patent applications are subject to these uncertainties and decisions by courts and/or administrative agencies may have an adverse impact on the patentability, validity and/or enforceability of our patents and patent applications.

In particular, the patent positions of companies engaged in the development and commercialization of tests, like our current products and tests, and our future products, are particularly uncertain. Various courts, including the U.S. Supreme Court, have rendered decisions that affect the eligibility, scope and enforceability of certain types of inventions or discoveries relating to tests and related methods. These decisions state, among other things, that a patent claim that recites an abstract idea (e.g., a mental step), natural phenomenon or law of nature are not eligible for patent protection. Precisely what constitutes a law of nature is uncertain, and it is possible that certain aspects of genetic diagnostics tests would be considered ineligible for patent protection under the current standards or a future standard promulgated by a court, administrative body or legislature. Accordingly, the evolving legal and

 

64

administrative standards around the world, including in the United States may adversely affect our ability to obtain patents and may facilitate third-party challenges to any patents that we own or license. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as the laws of the United States, and we may encounter difficulties in protecting and defending such rights in foreign jurisdictions. The legal systems of many foreign jurisdictions do not favor the enforcement of patent rights and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patent rights and other intellectual property rights thereunder. Proceedings to enforce our patent rights and other intellectual property protection in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

We rely on patents and patent applications licensed from Stichting Het Nederlands Kanker Instituut-Antoni van Leeuwenhoek Ziekenhuis, or NKI, to protect our MammaPrint test. These patents and any patents that may issue from these currently pending patent applications are expected to expire between June 2022 and October 2024, absent any patent term extensions. If we are unable to obtain additional patent protection covering the MammaPrint test then we will not be able to exclude competitors from marketing a directly competing product to our MammaPrint test after October 2024.

Athyrium Opportunities III Acquisition LP, an affiliate of Athyrium Opportunities III Acquisition 2 LP, or Athyrium, has recorded a security interest in our patents and applications as part of their Senior Notes. If we breach our obligations under these notes then Athyrium has the right to take ownership of these patents and applications.

Changes in patent law in the United States and other jurisdictions could diminish the value of patents in general, thereby impairing our ability to protect our products.

Changes in either the patent laws or in interpretations of patent laws in the United States or other countries or regions may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. We may not develop additional proprietary products, methods and technologies that are patentable.

Assuming that other requirements for patentability are met, prior to March 16, 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. On or after March 16, 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 16, 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. A third party that files a patent application in the United States Patent and Trademark Office, or USPTO, on or after March 16, 2013, but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This will require us to be cognizant of the time from invention to filing of a patent application. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we or our licensors were the first to either (i) file any patent application related to our product candidates or (ii) invent any of the inventions claimed in our or our licensor’s patents or patent applications. Moreover, even if we are the first to file a patent application on a particular invention, a third party may challenge our right to the claims in such filing under the theory that we derived the claimed invention from such third party. Such derivation proceedings in the United States are increasing and, if such a challenge is made to any of our patents or patent applications, it could have an adverse impact on our ability to obtain and/or maintain patents.

 

65

The America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also affect patent litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution or post-grant proceedings, including post-grant review, inter partes review and derivation proceedings, to attack the validity of a patent. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in U.S. federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence might not be sufficient to invalidate the claim if presented in a district court action. Accordingly, third parties may use the USPTO proceedings to invalidate our patent claims that would not have been invalidated if first challenged by the third party in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding our or our licensors’ prosecution of patent applications and enforcement or defense of issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Issued patents covering our products could be found invalid or unenforceable if challenged.

The issuance of a patent is not conclusive as to the inventorship, scope, validity or enforceability of the claims therein. Some of our owned or licensed patent rights may be challenged at a future point in time in opposition, derivation, re-examination, inter partes review, post-grant review or interference. Any successful third-party challenge to our patent rights in these or any other proceedings could result in our patents not issuing or in the unenforceability or invalidity of our issued patent rights, which may lead to increased competition to our business, which could harm our business. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize our current or future products.

We may not be aware of all third-party intellectual property rights potentially relating to our products and product candidates. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until approximately 18 months after filing or, in some cases, not until such patent applications issue as patents. We might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may be required to participate in interference proceedings, derivation proceedings or other post-grant proceedings declared by the USPTO that could result in substantial cost to us. The outcome of such proceedings is uncertain. No assurance can be given that third party patent applications will not have priority over our patent applications. In addition, changes to the patent laws of the United States allow for various post-grant opposition proceedings that have not been extensively tested, and their outcome is therefore uncertain. Our licensors may also license patent rights to others, and we may not be aware of such licenses before they are granted or such licenses may be subject to disputes or uncertainties that affect patent rights licensed by us or could limit our ability to enforce such patent rights. If third parties bring actions against our owned or licensed patent rights, we could experience significant costs, management distraction and loss of rights.

In patent litigation in the United States or abroad, 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 or enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the patent office or made a misleading statement during prosecution. Similar claims may also be raised before patent offices in the United States or abroad, even outside the context of litigation, through mechanisms including re-examination, post-grant review and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings

 

66

could result in revocation or alterations to our patent rights in such a way that they no longer cover our products or the products of competitors. The outcome of patent litigation or patent office proceedings following assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant 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 and our ability to assert patent rights against third parties. Such a loss of patent protection could have a material adverse impact on our business. In addition, in the United States it is common for parties to file a declaratory judgment action against a patent holder seeking a declaration of invalidity, unenforceability or non-infringement even if a patent holder has not filed a patent infringement suit. It is possible that third parties could challenge our patents in this way and such a challenge would result in a significant expense and management distraction and may result in a loss of patent rights or a reduction in the scope of our patents.

We and some of our licensors may in the future initiate or become involved in legal proceedings against third parties to enforce a patent covering one of our products. Such a proceeding could have a material adverse impact on our business. Any assertion of invalidity and/or unenforceability against the patents covering our products, even if not successful, could be time-consuming and expensive to defend, damage our reputation in the marketplace and the prospects for our business, and divert our management’s attention.

We rely on licenses from third parties, and if we lose these licenses then we may be subjected to future litigation.

We are party to a license agreement, and we may acquire companies that are, party to various license agreements that grant us rights to use certain intellectual property, including patents and patent applications, typically in certain specified fields of use. We may need to obtain additional licenses from others to advance our research, development and commercialization activities. Our license agreement imposes, and we expect that future license agreements will impose, various development, diligence, commercialization and other obligations on us, including obligations to making payments to our licensors upon achievement of certain clinical or commercial milestones.

In spite of our efforts, our licensors may in the future assert that we have materially breached our obligations under such license agreements and could therefore seek or threaten to terminate the license agreements. If these licenses are terminated, or if the underlying patent rights fail to provide the intended exclusivity, our ability to develop and commercialize products and technology covered by these license agreements would be limited or lost, and our competitors or other third parties might have the freedom to develop, produce, seek regulatory approval of, or to market, products identical or similar to ours and we may be required to cease our development and commercialization activities. Our actual or potential licensors could take action with respect to our licensed intellectual property that may decrease the value of such licensed intellectual property. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations and prospects. Moreover, disputes could arise with respect to any aspect of our license agreements, including:

 

•

the scope of rights granted under the license agreement and other interpretation-related issues;

 

•

the extent to which our products or product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

•

the licensing of patent and other rights controlled by our licensors or developed under our collaborative development relationships to others;

 

67

•

our diligence obligations under the license agreement and what activities satisfy those diligence obligations;

 

•

the inventorship and ownership of inventions and know-how licensed to us or resulting from the joint creation or use of intellectual property by our licensors, us and/or our partners;

 

•

the validity, enforceability or priority of licensed patent rights; and

 

•

the amount of royalties and other payments we are obligated to pay under the license agreement.

If we do not prevail in such disputes, we may lose any of such license agreements, the license agreements may not be meaningful for our business and operations, and we may be subject to unnecessary or additional payment obligations.

In addition, the agreements under which we currently license intellectual property or technology from third parties are complex, and certain provisions in such agreements could be susceptible to multiple interpretations. The resolution of any such contract interpretation disagreement 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. Moreover, if disputes over licensed intellectual property impair our ability to enforce licensed intellectual property against third parties or use it to defend ourselves in litigation, the value of such licensed intellectual property may be diminished.

If we fail to maintain our current licensing arrangements on commercially acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates, which could have a material adverse effect on our business, financial condition, results of operations and prospects. If any of these license agreements is terminated, if the licensor fails to abide by the terms of the license agreement, if the licensor fails to prevent infringement by third parties, or if the licensed patent or other rights are found to be invalid or unenforceable, we may be unable to achieve our business goals and our results of operations and financial condition could be adversely affected. Absent the license agreements, we could infringe patents subject to those agreements, and if the license agreements are terminated, we may be subject to litigation by the licensor. Litigation could result in substantial costs and be a distraction to management. If we do not prevail, we may be required to pay damages, including treble damages, attorneys’ fees, costs and expenses, royalties or, be enjoined from selling our products or services, including our tests, which could adversely affect our ability to offer products or services, our ability to continue operations and our financial condition.

We rely on patents licensed from NKI to protect our MammaPrint test. These patents and patent applications are co-owned by NKI and Merck Sharp & Dohme Corp. or Merck. We have no rights to protect our exclusivity against Merck, which is free to commercialize products using the patents, or to license the rights to any third party without restriction. NKI has retained the right to use the patents and patent applications for non-commercial academic purposes, which excludes research that is sponsored by commercial parties that compete directly with us. We are unable to assert these patents against infringers without NKI and Merck agreeing to join any litigation as co-owners of the patents. These patents are and any patents that may issue from these currently pending patent applications are expected to expire between June 2022 and October 2024, absent any patent term extensions.

 

68

We rely in-part on a utility patent and a patent application that we co-own with NKI to protect our MammaPrint test. The utility patent that we co-own with NKI covers methods of typing a patient suffering from breast cancer, specifically lobolar breast cancer. The patent expires in March 2036 and is validated and pending in Germany, France, and the United Kingdom. We have an exclusive option to license NKI’s world-wide rights for this patent and application. If we are unable to obtain an exclusive license from NKI for their rights to such patent and application then we will have no rights to protect our exclusivity against NKI, which is free to commercialize products using the patent, or to license the rights to any third party without restriction. We will be unable to assert this patent against infringers without NKI agreeing to join any litigation as co-owners of the patent.

We engage in collaboration agreements with third parties that may result in co-ownership with such third parties of patents and patent applications relevant to future products. If we are unable to obtain an exclusive license from such third parties for their rights to such patents and patent applications then we will have no rights to protect our exclusivity against such third parties, which would be free to commercialize products using the patents, or to license the rights to any third party without restriction. We will be unable to assert these patents against infringers without such third parties agreeing to join any litigation as co-owners of the patents.

Certain of the company’s material agreements do not specifically identify the patents that are subject to the license or option granted in those agreements. As a result, the owners of the patents that are intended to be subject to the license could bring an enforcement action with respect to those patents against the company, and the company may be unable to demonstrate that it is a licensee against whom the patent should not be enforced. The licensor or option grantor may also inadvertently grant conflicting licenses or rights under those patents because its documentation does not clearly reflect the rights it has granted to the company. Either of these scenarios may result in unanticipated disputes and expenses for the company, and may jeopardize its ability to develop and commercialize its products that are covered by such patents.

If we cannot license and maintain rights to use third-party technology on reasonable terms, we may not be able to successfully commercialize our products. Our licensed or acquired technology may lose value or utility or over time.

From time to time, we may identify third-party technology we may need, including to develop or commercialize new products or services. We may also need to negotiate licenses to patents or patent applications before or after introducing a commercial product, and we may not be able to obtain necessary licenses to such patents or patent applications. If we are unable to enter into the necessary licenses on acceptable terms or at all, if any necessary licenses are subsequently terminated, if the licensors fail to abide by the terms of the licenses or fail to prevent infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable, our business may suffer. In addition, any technology licensed or acquired by us may lose value or utility, including as a result of a change in the industry, in the law, in our business objectives, others’ technology, our dispute with the licensor, and other circumstances outside our control. In return for the use of a third party’s technology, we may agree to pay the licensor royalties and/or other payments based on sales of our products or services. Royalties are a component of cost of products or services and affect the margins on our products or services. If we are unable to negotiate reasonable royalties or if we have to pay royalties on technology that becomes less useful for us or ceases to provide value to us, our profit margin will be reduced and we may suffer losses.

 

69

We may not be able to protect or enforce our intellectual property rights adequately throughout the world.

Filing, prosecuting and defending patents and patent applications on our products and services in all countries throughout the world would be prohibitively expensive, and, as such, we typically do not file patent applications in all countries. Moreover, our intellectual property rights in some territories outside the United States in which we do file can be less extensive than those in the United States. In addition, the laws of some foreign countries and regions do not protect intellectual property rights to the same extent as the laws of the United States, and we may encounter difficulties in protecting and defending such rights in foreign jurisdictions. Consequently, we may not be able to prevent third parties from practicing our inventions in all jurisdictions, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our inventions in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products. Our patents or other intellectual property rights existing outside the United States may not be effective or sufficient to prevent third parties from competing. Similarly, intellectual property rights may be exhausted in certain situations, and others could import our products sold abroad and compete with us domestically.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of many other countries and regions do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents in such jurisdictions. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded to us, if any, may not be commercially meaningful. Accordingly, our efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage.

Our use of open source software could impose limitations on our ability to commercialize our product candidates.

Our use of open source software could impose limitations on our ability to commercialize our product candidates. Our technology utilizes open source software that contains modules licensed for use from third party authors under open source licenses. In particular, some of the software that powers our technology may be provided under license arrangements that allow use of the software for research or other non-commercial purposes. As a result, in the future, as we seek to use our platform in connection with commercially available products, we may be required to license that software under different license terms, which may not be possible on commercially reasonable terms, if at all. If we are unable to license software components on terms that permit its use for commercial purposes, we may be required to replace those software components, which could result in delays, additional cost and additional regulatory approvals.

Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the software code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time, and ultimately

 

70

could result in a loss of product sales for us. Although we monitor our use of open source software, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that those licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our product candidates. We could be required to seek licenses from third parties in order to continue offering our product candidates, to re-engineer our product candidates or to discontinue the sale of our product candidates in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business, financial condition, results of operations and prospects.

If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business could be harmed.

In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into agreements, including confidentiality agreements, non-disclosure agreements and intellectual property assignment agreements, with our employees, consultants, academic institutions, corporate partners and, when needed, our advisers. However, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other proprietary information (such as know-how) will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. For example, 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. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized use or disclosure. If we are required to assert our rights against such party, it could result in significant cost and distraction. Moreover, trade secret laws vary by jurisdiction and courts in various jurisdictions take significantly different approaches to the enforcement of trade secrets. We may not be able to comply with legal standards for the establishment and/or maintenance of trade secrets and we may not be able to adequately enforce a violation of our trade secrets by our employees, consultants, partners and advisors. A disclosure of any of our trade secrets may have an adverse impact on our business and our ability to maintain exclusivity around our products and services.

Monitoring unauthorized use or disclosure is difficult, and we do not know whether the steps we have taken to prevent such use or disclosure are, or will be, adequate. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time-consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.

We also seek to preserve the integrity and confidentiality of our proprietary information by maintaining physical security of our premises and physical and electronic security of our information technology systems, but it is possible that these security measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, absent patent protection, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

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

We employ and engage, and expect to employ or engage individuals who were previously employed at or associated with universities or other companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and independent contractors

 

71

do not use the proprietary information, trade secrets, patented technology, or know-how of others in their work for us, we may be subject to claims that our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or other third parties, or to claims that we have improperly used or obtained such trade secrets or other proprietary information of third parties. Litigation may be necessary to defend against these claims. If we lose, in addition to paying monetary damages, we may be deprived of valuable intellectual property and face increased competition. A loss of key research personnel or work product could hamper or prevent our ability to commercialize potential products, which could harm our business. Even if we are successful in defending against these claims, litigation could result in damage to our reputation and substantial costs and be a distraction to management and affected individuals.

We may not be able to protect and enforce our trademarks and we could infringe others’ trademarks.

We have not yet registered trademarks in all of our potential markets, although we have registered Agendia, MammaPrint, and BluePrint in the United States and rely on common law trademark protection for certain unregistered marks. If we apply to register additional trademarks in the United States and other countries, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not timely register and enforce marks used in connection with our products or services, we may encounter difficulty in enforcing them against third parties, and if these marks are registered by others, we could infringe such trademarks.

We may be subject to claims challenging the inventorship or ownership of our owned or licensed intellectual property.

We or our licensors may be subject to claims that former employees, collaborators or other third parties have an interest in or right to our owned or licensed patents, trade secrets, copyrights or other intellectual property. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants or others who are involved in developing such intellectual property. In addition, we or our licensors could be accused of intentionally or inadvertently omitting or adding inventors to a patent application. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership of our owned or licensed patents, trade secrets or other intellectual property. If we or our licensors fail in defending against any such claims, we may lose exclusive ownership of, or right to use, valuable intellectual property. Even if we are successful in defending against such claims, litigation could result in damage to our reputation and substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may become involved in litigation and other legal proceedings related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operating results or financial condition.

We may in the future be involved with litigation or USPTO actions with various third parties. We expect that the number of such claims may increase as the number of our products or services grows, and the level of competition in our industry segments increases. Any infringement claim, regardless of its validity, could harm our business by, among other things, resulting in time-consuming and costly litigation, diverting management’s time and attention from the development of our business, or requiring the payment of monetary damages (including treble damages, attorneys’ fees, costs and expenses if we are found to have willfully infringed) and ongoing royalties.

 

72

Litigation may be necessary for us to enforce our intellectual property and proprietary rights or to determine the scope, coverage and validity of the intellectual property and proprietary rights of others. The outcome of such lawsuits, as well as any other litigation or proceeding, is inherently uncertain and might not be favorable to us. Further, we could encounter delays in product introductions, or interruptions in sale of products or services, as we develop alternative products or services. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity, scope and coverage of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. If we do not prevail in such legal proceedings, we may be required to pay damages, and we may lose significant intellectual property protection for our products or services, such that competitors could copy our products or services. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.

As we move into new markets and applications for our products or services, incumbent participants in such markets may assert their patents and other intellectual property or proprietary rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. As our business matures and our public profile grows, we may also be subject to an increased number of allegations of patent infringement, whether by our competitors or other patent owners, both in the United States and throughout the world wherever we seek to commercialize our products and services. Our competitors and others may have significantly larger and more mature patent portfolios than we have. In addition, while we can assert our own patents or other rights during litigation, our own patents may provide little or no deterrence or protection against patent holding companies or other patent owners who have no relevant product or service revenue, and doing so may result in the invalidity or reduction in scope of our patents. Therefore, our commercial success may depend in part on our non-infringement of the patents or other rights of third parties and on our success in defending ourselves in litigation.

However, our research, development and commercialization activities may in the future be subject to claims that we infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. There is a substantial amount of litigation and other patent challenges, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology industry, including patent infringement lawsuits, interferences, oppositions and inter partes review proceedings before the USPTO, and corresponding proceedings before foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products. As the precision oncology industry expands and more patents are issued, the risk increases that our products or services may be subject to claims of infringement of the patent rights of third parties. Numerous significant intellectual property issues have been litigated, are being litigated and will likely continue to be litigated, between existing and new participants in our existing and targeted markets, and our competitors may in the future assert that our products or services infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets, and we may enforce our owned or licensed intellectual property rights against our competitors and other parties.

Third parties may in the future assert that we are using their proprietary technology or trade secrets without authorization. We are also aware of issued U.S. patents and patent applications with claims related to our products and services, and there may be other related third-party patents or patent applications of which we are not aware. By interacting with us, our licensors or potential partners may learn more about our business or technology and could assert additional patent rights against us, such as patent rights that are not currently licensed to us or patent rights that may be obtained by any such licensors in the future, which may occur if such patent rights are not available for licensing or if they are not offered on acceptable or commercially reasonable terms. Because patent

 

73

applications can take many years to issue and are not publicly available until a certain period of time passes from filing, there may be currently pending patent applications which may later result in issued patents that our current or future products and services may infringe. In addition, similar to what other companies in our industry have experienced, we expect our competitors and others may develop or obtain patents with our products or services in mind and claim that making, having made, using, selling, offering to sell or importing our products or services infringes these patents.

We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can, for example, because they have substantially greater resources.

Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell certain products or services, and could result in the award of substantial damages against us, including treble damages, attorney’s fees, costs and expenses if we are found to have willfully infringed. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, and obtain one or more licenses from third parties, or be prohibited from selling certain products or services. We may not be able to obtain these licenses on acceptable or commercially reasonable terms, if at all, or these licenses may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. In addition, we could encounter delays in product or service introductions while we attempt to develop alternative products or services to avoid infringing third-party patents or proprietary rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing products or services, and the prohibition of sale of any of our products or services could materially affect our business and our ability to gain market acceptance for our products or services.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our ordinary shares.

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

Obtaining and maintaining our patent protection depends on compliance with various required procedures, document submissions, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications have been, and will become, due to be paid to the USPTO and various governmental patent agencies outside of the United States at several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we rely on our outside counsel and third party vendors to pay these fees due to non-U.S. patent agencies. The

 

74

USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar requirements during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or forfeiture of the patent or patent application and thus loss of patent rights in the relevant jurisdiction. Such an event would allow our competitors to enter the unprotected market and have a material adverse effect on our business.

Patent terms may be inadequate to protect our competitive position for an adequate amount of time.

Patents have a limited lifespan. 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 patent term extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our products or services are obtained (either by us or our licensors), once the patent life has expired, we may be open to competition. Given the amount of time required for the development, testing and regulatory review of our new products or services, patents protecting them might expire before or shortly after they are commercialized. As a result, our owned and licensed patent portfolio may not provide us with a sufficient exclusivity period to exclude others from commercializing products or services similar or identical to ours.

Risks Related to Being a Public Company

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

As a public company, and particularly after we no longer qualify as an emerging growth company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq and other applicable securities rules and regulations impose various requirements on non-U.S. reporting public companies, including the establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our board of directors and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, which in turn could make it more difficult for us to attract and retain qualified members of our board of directors. Evolution of these requirements, or how these requirements are interpreted, could also result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.

We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, as a result, will not be subject to the same implementation timing for new or revised accounting standards as are required of other public companies that are not emerging growth companies, which may make comparison of our consolidated financial information to those of other public companies more difficult.

 

75

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

We will remain an emerging growth company until the earliest of (a) the end of the fiscal year (i) following the fifth anniversary of the closing of this offering, (ii) in which the market value of our ordinary shares that is held by non-affiliates exceeds $700 million and (iii) in which we have total annual gross revenue of $1.07 billion or more during such fiscal year, and (b) the date on which we issue more than $1 billion in non-convertible debt in a three-year period.

Material weaknesses were identified in our internal control over financial reporting and additional material weaknesses may be identified in the future, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations.

In connection with the preparation of our consolidated financial statements, material weaknesses in

our internal control over financial reporting were identified as of December 31, 2020 as described

below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over

financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weaknesses identified included:

 

•

We did not design and maintain effective controls to ensure adequate segregation of duties within the financial reporting function, including controls related to account reconciliations and journal entries. Specifically, controls were not designed and maintained to verify personnel would not have the ability to prepare and post manual journal entries or review account reconciliations without an independent review by someone without the ability to prepare and post manual journal entries. This material weakness did not result in adjustments to the consolidated financial statements; however, it could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the consolidated financial statements that would not be prevented or detected.

 

•

We did not design and maintain effective controls over IT general controls, or ITGCs, for information systems that are relevant to the preparation of our consolidated financial statements. The IT deficiencies did not result in adjustments to the consolidated financial statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would result in a material misstatement to the consolidated financial statements that would not be prevented or detected.

We are implementing plans to remediate the material weaknesses identified. These remediation measures are ongoing as of the date of this prospectus and include improving documentation around existing ITGCs to allow for the efficient verification of controls, implementing enhanced ITGCs, engaging a third party to assist in evaluating, designing and implementing controls related to

 

76

segregation of duties consistent with the Committee of Sponsoring Organizations of the Treadway Commission framework to address the risk of material misstatement, and enhancing IT governance processes.

We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be negatively impacted, we may be unable to maintain compliance with securities law requirements in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our ordinary share price may decline as a result.

We are required to assess our internal control over financial reporting on an annual basis and any future adverse results from such assessment could result in a loss of investor confidence and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management will be required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending December 31, 2022. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. 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. Establishing, testing and maintaining an effective system of internal control over financial reporting requires significant resources and time commitments on the part of our management and our finance staff, may require additional staffing and infrastructure investments and would increase our costs of doing business. 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 Section 404. If we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness of our internal controls or conclude that our internal controls are ineffective), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

Risks Related to This Offering and Ownership of Our Ordinary Shares

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

Prior to this offering, there has been no public market for our ordinary shares. We cannot predict the extent to which an active market for our ordinary shares will develop or be sustained after this offering, or how the development of such a market might affect the market price for our ordinary shares. The initial public offering price of our ordinary shares in this offering will be agreed upon between us and the underwriters based on a number of factors, including market conditions in effect at the time of the offering, which may not be indicative of the price at which our shares will trade following completion of the offering. Investors may not be able to sell their shares at or above the initial public offering price.

 

77

The market price of our ordinary shares is likely to be volatile, which could subject us to litigation.

The share price of publicly traded emerging precision oncology companies has been highly volatile and is likely to remain highly volatile in the future. The market price of our ordinary shares is likely to be subject to wide fluctuations in response to numerous factors, many of which are beyond our control, such as those in this “Risk Factors” section and others including:

 

•

volume and payor mix of our precision oncology testing;

 

•

the introduction of new products or product enhancements by us or others in our industry;

 

•

our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis;

 

•

actual or anticipated variations in our and our competitors’ operating results;

 

•

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

 

•

changes in reimbursement by current or potential payors;

 

•

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

 

•

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

 

•

actual or anticipated changes in regulatory oversight of our products;

 

•

developments or disputes concerning our intellectual property or other proprietary rights or alleged infringement of third party’s rights by our products;

 

•

commencement of, or our involvement in, litigation or other proceedings;

 

•

developments relating to the COVID-19 pandemic or measures taken in response to the COVID-19 pandemic;

 

•

announcement or expectation of additional debt or equity financing efforts;

 

•

sales of our ordinary shares by us, our insiders or our other shareholders;

 

•

any major change in our management; and

 

•

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

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

 

78

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

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

Our principal shareholders and management will own a significant percentage of our capital stock and will be able to exert significant control over us, and your interests may conflict with the interests of our existing shareholders.

Without giving effect to any shares they may purchase in this offering, our current directors and executive officers, together with their affiliates, will beneficially own, in the aggregate, approximately     % of our outstanding ordinary shares after the completion of this offering, based on the number of shares outstanding as of June 30, 2021 on an as-converted basis after the completion of this offering. As a result, after this offering, these shareholders will be able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. They may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership could limit shareholders ability to influence corporate matters and may have the effect of delaying, deterring or preventing a third party from acquiring control over us, depriving our shareholders of an opportunity to receive a premium for their ordinary shares as part of a sale of our company, and could negatively impact the value and market price of our ordinary shares.

We have never paid dividends on our ordinary shares and do not intend to do so.

We have never declared or paid dividends on our ordinary shares. Even if future operations lead to significant levels of distributable profits, we currently intend that any earnings will be reinvested in our business and that dividends will not be paid until we have an established revenue stream to support continuing dividends. Under our Articles of Association, the board of directors may decide that all or part of the profits are carried to reserves. After reservation by the board of directors of any profit, the remaining profit will be at the disposal of the general meeting of shareholders. However, any future determination to pay dividends to the holders of our ordinary shares can only be resolved upon by the general meeting of shareholders, upon proposal of the board of directors. Any future approval will depend on the board’s review of various factors including our business prospects, cash requirements, financial performance and new product development. In addition, payment of future dividends may be made only if our shareholders’ equity exceeds the sum of our paid-in and called-up share capital plus the reserves required to be maintained by Dutch law or by our Articles of Association. Any future debt or preference securities or future debt agreements we may enter may also preclude us from paying dividends. Accordingly, investors cannot rely on dividend income from our ordinary shares and any returns on an investment in our ordinary shares will likely depend entirely upon any future appreciation in the price of our ordinary shares.

 

79

If you purchase our ordinary shares in this offering, you will incur immediate and substantial dilution.

The initial public offering price is substantially higher than the as-converted net tangible book value per share of our ordinary shares as of June 30, 2021. Investors purchasing ordinary shares in this offering will pay a price per share that substantially exceeds the book value of our total tangible assets after subtracting our total liabilities. As a result, investors purchasing ordinary shares in this offering will incur immediate dilution of approximately $             per share, based on an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover of this prospectus.

This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering, and any previous exercise of stock options granted to our service providers. In addition, as of June 30, 2021, 15,160,670 options to purchase our ordinary shares with a weighted average exercise price of approximately €0.5942 per share were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive less than the purchase price paid in this offering, if anything, in the event of our liquidation.

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

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

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

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

All of our executive officers and directors and our principal shareholders are subject to lock-up agreements with the underwriters of this offering that restrict the shareholders’ ability to transfer shares of our ordinary shares for at least 180 days from the date of this prospectus, except with the prior written consent of Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., and Cowen and Company, LLC. Subject to certain limitations, approximately              of our ordinary shares will become eligible for sale upon expiration of the 180-day lock-up period. In addition, shares issued or issuable upon exercise of options vested as of the expiration of the 180-day lock-up period will be eligible for sale at that time.

All of our issued and outstanding shares of ordinary shares will be freely tradable after the expiration date of the lock-up agreements, excluding any shares acquired in this offering by persons who may be deemed to be our affiliates as defined in Rule 144 under the Securities Act. Ordinary shares of ours held by our affiliates will continue to be subject to the volume and other restrictions of Rule 144 under the Securities Act. Sales of a substantial number of these shares upon expiration of the lock-up agreements could adversely affect the trading price of our ordinary shares.

 

80

We are a foreign private issuer and, as a result, we are not subject to U.S. proxy rules and are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. domestic public company.

We will report under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as a non-U.S. company with foreign private issuer status. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, foreign private issuers are not required to file their annual report on Form 20-F until four months after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information.

As a result of the above, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers. However, we are subject to Dutch laws and regulations with regard to such matters and intend to furnish quarterly unaudited financial information to the SEC on Form 6-K.

We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

We are a foreign private issuer and therefore we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers. If in the future we are not a foreign private issuer as of the last day of the second fiscal quarter in any fiscal year, we would be required to comply with all of the periodic disclosure, current reporting requirements and proxy solicitation rules of the Exchange Act applicable to U.S. domestic issuers. In order to maintain our current status as a foreign private issuer, either (a) a majority of our ordinary shares must be either directly or indirectly owned of record by non-residents of the United States or (b)(i) a majority of our directors and executive officers may not be U.S. citizens or residents, (ii) more than 50% of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. If we were to lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and stock exchange rules. The regulatory and compliance costs to us if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the costs we would incur as a foreign private issuer. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. These rules and regulations could also make it more difficult for us to attract and retain qualified directors.

 

81

As a foreign private issuer and as permitted by the listing requirements of Nasdaq, we follow certain home country governance practices rather than the corporate governance requirements of Nasdaq.

We are a foreign private issuer. As a result, in accordance with the listing requirements of Nasdaq we will rely on home country governance requirements and certain exemptions thereunder rather than relying on the corporate governance requirements of Nasdaq. In accordance with Dutch law and generally accepted business practices, our Articles of Association do not provide quorum requirements generally applicable to general meetings. To this extent, our practice varies from the requirement of Nasdaq Listing Rule 5620(c), which requires an issuer to provide in its bylaws for a generally applicable quorum, and that such quorum may not be less than one-third of the outstanding voting shares. Although we must provide shareholders with an agenda and other relevant documents for the general meeting, Dutch law does not have a regulatory regime for the solicitation of proxies and the solicitation of proxies is not a generally accepted business practice in the Netherlands, thus our practice will vary from the requirement of Nasdaq Listing Rule 5620(b). As permitted by the listing requirements of Nasdaq, we have also opted out of the requirements of Nasdaq Listing Rule 5605(d), which requires, among other things, an issuer to have a compensation committee that consists entirely of independent directors, Nasdaq Listing Rule 5605(e), which requires independent director oversight of director nominations, and Nasdaq Listing Rule 5605(b)(1), which requires an issuer to have a majority of independent directors on its board. In addition, we have opted out of shareholder approval requirements, as included in the Nasdaq Listing Rules, for the issuance of securities in connection with certain events such as the acquisition of shares or assets of another company, the establishment of or amendments to equity-based compensation plans for employees, a change of control of our company and certain private placements. To this extent, our practice varies from the requirements of Nasdaq Rule 5635, which generally requires an issuer to obtain shareholder approval for the issuance of securities in connection with such events. For an overview of our corporate governance principles, see “Description of Share Capital and Articles of Association.” Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to these Nasdaq requirements.

Provisions of our Articles of Association or Dutch corporate law might delay or prevent acquisition bids for us or other change of control transactions that might be considered favorable

Under Dutch law, various protective measures to prevent change of control transactions are possible and permissible within the boundaries set by Dutch corporate law and Dutch case law. Certain provisions of our Articles of Association may have the effect of delaying or preventing a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a shareholder might consider to be in its best interest, including attempts that might result in a premium over the market price of our ordinary shares.

These provisions provide for, among other things:

 

•

a provision that our directors may only be removed at the general meeting of shareholders by a two-thirds majority of the votes cast representing more than 50% of our outstanding share capital if such removal is not proposed by our board of directors;

 

•

our directors being appointed on the basis of a binding nomination by our board of directors, which can only be overruled by the general meeting of shareholders by a resolution adopted by at least a two-thirds majority of the votes cast, provided such majority represents more than half of the issued share capital (in which case the board of directors may draw up a new nomination); and

 

•

requirements that certain matters, including an amendment of our Articles of Association, may only be brought to our shareholders for a vote upon a proposal by our board of directors.

 

82

These provisions could make it more difficult or less attractive for a third party to acquire us or a controlling stake in us, even if the third party’s offer may be considered beneficial by many of our shareholders. As a result, our shareholders may be limited in their ability to obtain a premium for their shares.

Provisions in our Articles of Association or Dutch corporate law might prevent, delay or frustrate any attempt to replace or remove the members of our board of directors

Certain provisions of our Articles of Association or Dutch corporate law may make it more difficult for a shareholder or a third party to effect a change in our board of directors. These provisions include: a provision that our directors are appointed on the basis of a binding nomination prepared by our board of directors, which can only be overruled by a two-thirds majority of the votes cast representing more than 50% of our issued share capital; a provision that our directors may only be removed by the general meeting of shareholders by a two-thirds majority of the votes cast representing more than 50% of our issued share capital (unless the removal is proposed by the board of directors in which case a simple majority of the votes can be sufficient); and a requirement that certain matters, including an amendment of our Articles of Association, may only be brought to our shareholders for a vote upon a proposal by our board of directors. In addition, Dutch law allows for staggered multi-year terms of directors, as a result of which only part of our directors may be subject to appointment or re-appointment in any one year.

Our Articles of Association will provide that the competent courts of Amsterdam, the Netherlands will be the sole and exclusive forums for certain shareholder litigation matters, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our current and former directors, officers, employees or shareholders

Our Articles of Association will provide that, unless we otherwise consent in writing to the selection of an alternative forum, the competent courts of Amsterdam, the Netherlands shall be the sole and exclusive forum for any dispute between (i) any person holding our ordinary shares or an interest in our ordinary shares and (ii) us, any of our directors, officers or employees (including any of our former directors, former officers or former employees to the extent the dispute arises from such director, officer or other employee’s acts or omissions while serving as our director, officer or employee), in each case (a) whether such dispute relates to the Articles of Association or otherwise and (b) provided that 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, the Exchange Act or the rules and regulations promulgated thereunder; however, there is uncertainty as to whether a court would enforce such provision for any cause of action under the Securities Act, and investors cannot waive compliance with federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in our ordinary shares shall be deemed to have notice of and consented to the forum provisions in our Articles of Association.

These choice of forum provisions may limit a shareholder’s ability to bring a claim in a different judicial forum, including one that it may find favorable or convenient for disputes with us or any of our directors, officers or other employees which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions that will be contained in our Articles of Association to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

Holders of our ordinary shares outside the Netherlands may not be able to exercise preemptive rights and, as a result, may experience substantial dilution upon future issuances of ordinary shares or rights to subscribe for ordinary shares.

In the case of certain offerings of additional equity capital, existing holders of our ordinary shares are generally entitled under Dutch law to full preemptive rights, unless these rights are excluded either

 

83

by a resolution of the general meeting of shareholders, or by a resolution of the board of directors (if the board of directors has been designated by the general meeting of shareholders for this purpose). See “Description of Share Capital and Articles of Association—Comparison of Dutch Corporate Law and Our Articles of Association and United States Corporate Law—Preemptive Rights.” Certain holders of our ordinary shares, in particular U.S. holders of our ordinary shares, may not be able to exercise preemptive rights unless a registration statement under the Securities Act is declared effective with respect to our ordinary shares issuable upon exercise of such rights or an exemption from the registration requirements is available. This could cause existing shareholders to experience substantial dilution of their interest.

The rights of our shareholders may be different from the rights of shareholders in companies governed by the laws of U.S. jurisdictions.

Our corporate affairs are governed by our Articles of Association and by the laws governing companies incorporated in the Netherlands. A further summary of applicable Dutch company law and our Articles of Association is contained in this prospectus under “Description of Share Capital and Articles of Association.” However, there can be no assurance that Dutch law will not change in the future or that it will serve to protect investors in a similar fashion afforded under corporate law principles in the United States, which could adversely affect the rights of investors.

The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. In the performance of its duties, our board of directors is required by Dutch law to consider the interests of our company, its shareholders, its employees and other stakeholders, in all cases with due observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder. A further summary of applicable Dutch company law and our Articles of Association is contained in this prospectus under “Description of Share Capital and Articles of Association—Corporate Governance.”

We are not obligated to and do not comply with all the best practice provisions of the Dutch Corporate Governance Code. This may affect your rights as a shareholder.

We are subject to the Dutch Corporate Governance Code, or DCGC. The DCGC applies to all Dutch companies listed on a government-recognized stock exchange, whether in the Netherlands or elsewhere, including Nasdaq. The DCGC contains both principles and best practice provisions for boards of directors, shareholders and general meetings of shareholders, financial reporting, auditors, disclosure, compliance and enforcement standards. The DCGC is based on a “comply or explain” principle. Accordingly, companies are required to disclose in their annual reports, filed in the Netherlands, whether they comply with the provisions of the DCGC. If they do not comply with those provisions (for example, because of a conflicting Nasdaq requirement), the company is required to give the reasons for such noncompliance.

We do not comply with all the best practice provisions of the DCGC. See “Description of Share Capital and Articles of Association—Dutch Corporate Governance Code.” This may affect your rights as a shareholder and you may not have the same level of protection as a shareholder in another Dutch public company with limited liability (naamloze vennootschap) listed in the Netherlands that fully complies with the DCGC.

Pursuant to the Dutch Civil Code, Dutch limited liability companies may qualify as a so-called structure company (structuurvennootschap) to which the structure regime (structuurregime) is applicable. Currently, the requirements to qualify as such are that a company has filed a statement with the trade register of the Dutch Chamber of Commerce, for a consecutive period of three years, that it meets the following criteria (i) according to our balance sheet with explanatory notes, our issued share capital together with our reserves amounts to at least €16 million, (ii) we, or any of our dependent

 

84

companies (as defined by Dutch law), has established a Dutch works council pursuant to statutory requirements under Dutch law and (iii) we and our dependent companies (as defined by Dutch law) together regularly employ at least 100 employees in the Netherlands. The qualification as a structure company may affect the governance structure of our company. Among other things, our executive directors would then be appointed by our non-executive directors (instead of the general meeting) and certain nomination rights (including for the Dutch works council) would apply to the appointment of our non-executive directors. We have never filed a statement that we meet the criteria of the structure regime and do not expect to qualify as a structure company for at least the next three years.

Claims of U.S. civil liabilities may not be enforceable against us.

We are incorporated under the laws of the Netherlands. Certain of our directors reside outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them or us in U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.

The United States and the Netherlands currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments, other than arbitration awards, in civil and commercial matters. Consequently, a final judgment for payment given by a court in the United States, whether or not predicated solely upon U.S. securities laws, would not automatically be recognized or enforceable in the Netherlands, unless the underlying claim is relitigated before a Dutch court of competent jurisdiction. Under current practice, however, a Dutch court will generally, subject to compliance with certain procedural requirements, recognize and give effect to the judgment, if and to the extent such judgment (i) is a final judgment and has been rendered by a court which has established its jurisdiction on grounds which are internationally acceptable, (ii) has not been rendered in violation of proper legal procedures (behoorlijke rechtspleging), (iii) is not contrary to public policy of the Netherlands, and (iv) is not incompatible with (a) a prior judgment of a Dutch court rendered in a dispute between the same parties, or (b) a prior judgment of a foreign court rendered in a dispute between the same parties, concerning the same subject matter and based on the same cause of action, provided that such prior judgment is capable of being recognized in the Netherlands. If a Dutch court upholds and regards as conclusive evidence the final judgment of the U.S. court, the Dutch court will generally grant the same judgment without litigating again on the merits.

Dutch courts may deny the recognition and enforcement of punitive damages or other awards. Moreover, a Dutch court may reduce the amount of damages granted by a U.S. court and recognize damages only to the extent that they are necessary to compensate actual losses or damages. Enforcement and recognition of judgments of U.S. courts in the Netherlands are solely governed by the provisions of the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering). Based on the foregoing, there can be no assurance that U.S. investors will be able to enforce any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.

Dutch civil procedure differs substantially from U.S. civil procedure in a number of respects. Insofar as the production of evidence is concerned, U.S. law and the laws of several other jurisdictions based on common law provide for pre-trial discovery, a process by which parties to the proceedings may prior to trial compel the production of documents by adverse or third parties and the deposition of witnesses. Evidence obtained in this manner may be decisive in the outcome of any proceeding. Such pre-trial discovery process does not exist under Dutch law. In the event directors or other third parties are liable towards a Dutch company, only the company itself can bring a civil action against those parties. The individual shareholders do not have the right to bring an action on behalf of the company. Only in the event that the cause for the liability of a third party to the company also constitutes a tortious act directly against a shareholder, such shareholder has an individual right of action against such third party in its own name. The Dutch Civil Code does provide for the possibility to initiate such actions collectively and a foundation or an association whose objective is to protect the rights of a group of persons having similar interests can institute a collective action. The collective action itself does not

 

85

result in an order for payment of monetary damages but may only result in a declaratory judgment (verklaring van recht). To obtain compensation for damages, individual claimants can base their claim on the declaratory judgment obtained by the foundation or association but they still need to individually sue the defendant for damages. Alternatively, in order to obtain compensation for damages, the foundation or association and the defendant may reach—often on the basis of such declaratory judgment—a settlement. A Dutch court may declare the settlement agreement binding upon all injured parties with an opt-out choice for an individual injured party. An individual injured party may also itself institute a civil claim for damages.

Based on the lack of a treaty as described above, U.S. investors may not be able to enforce against us or members of our board of directors any judgments obtained in U.S. courts in civil and commercial matters, including judgments under the U.S. federal securities laws.

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

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

Our management has broad discretion over the use of our available cash and marketable securities and might not spend available cash and marketable securities in ways that increase the value of your investment.

From time to time we may carry high levels of cash and marketable securities. As of June 30, 2021, we had $22.3 million in cash and cash equivalents. Our management currently expects to deploy our cash and marketable securities primarily to expand our operations and commercialization activities, to fund our product development efforts and for general corporate purposes, including working capital and possible acquisitions. However, our management has broad discretion to pursue other objectives, we may raise additional capital, and we may use our current and future resources for other purposes. Our management might not effectively deploy our cash and marketable securities which could have an adverse effect on our business.

Risks Related to Taxation

Changes in tax treaties, laws, rules or interpretations or an adverse outcome of tax audits could have a material adverse effect on us.

The tax laws and regulations in the Netherlands and other jurisdictions in which we operate may be subject to change, and there may be changes in the interpretation, application and enforcement of such tax laws or regulations. As a result, we may face increases in taxes payable if tax rates increase, or if tax laws or regulations are modified in an adverse manner, or if new tax laws or regulations are introduced by the competent authorities with or without retrospective effect. The aforementioned changes or any future audit may require us to pay additional taxes plus accrued interest, fines and/or penalties. In addition, the Dutch tax authorities and other relevant jurisdictions could periodically examine us and our subsidiaries. Tax audits for periods not yet reviewed may consequently lead to higher tax assessments. Any additional taxes or other sums that become due could have a material adverse effect on our business, results of operations, cash flow and financial condition. Noteworthy

 

86

developments include the implementation of the Multilateral Convention to Implement Tax Treaty Related to Measures to Prevent Base Erosion and Profit Shifting and the publication of the Organisation for Economic Co-operation and Development Pillar I and Pillar II Blueprints in relation to Base Erosion and Profit Shifting. In addition, case law of the European Court of Justice may affect the VAT treatment of our services.

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

As of December 31, 2020, we had U.S. federal U.S. state and non-U.S. net operating loss carryforwards, or NOLs, of approximately $219.3 million, $205.9 million and $2.3 million, respectively. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change is generally defined as a greater than 50 percent change in equity ownership by value by certain shareholders (or groups of shareholders) over a rolling three-year period. We have not completed a formal analysis as to whether we have undergone ownership changes in the past that may limit utilization of our existing NOLs under Section 382 of the Code. Given the Code’s broad definition, an ownership change could be the unintended consequence of otherwise normal market trading in our stock that is outside our control. An ownership change under Section 382 of the Code could also be triggered by certain strategic transactions. Additionally, tax law limitations may result in our U.S. federal NOLs expiring before we have the ability to use them. Under current U.S. federal income tax law, U.S. federal NOLs arising in tax years beginning after December 31, 2017 have an indefinite carryover period, but for taxable years beginning after December 31, 2020, may only be used to offset 80 percent of current year taxable income. Similar (and additional) limitations may apply to the use of U.S. state and non-U.S. NOLs. For these reasons, even if we attain profitability, our ability to utilize our NOLs may be limited, potentially significantly so.

Our global operations and structure subject us to potentially adverse tax consequences.

We generally conduct our global operations through subsidiaries and report our taxable income in various jurisdictions worldwide based on our business operations in those jurisdictions. In particular, our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. Also, our tax expense could be affected depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. The relevant revenue and taxing authorities may disagree with positions we have taken generally, or our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. The tax laws of certain countries in which we do business could also change on a prospective or retroactive basis, and any such changes could increase our liabilities for taxes, interest and penalties, and therefore could harm our business, cash flows, operating results and financial position.

We may be a “controlled foreign corporation” for U.S. federal income tax purposes, and if a U.S. person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.

If a U.S. person is treated as owning (directly, indirectly or constructively, including pursuant to the operation of certain attribution rules under the Code and the Treasury Regulations promulgated thereunder) at least 10% of the value or voting power of our stock, such person may be treated as a

 

87

“United States shareholder” with respect to each “controlled foreign corporation,” or CFC, in our group (if any). We believe we are currently, and following this offering may be, treated as a CFC. If we are treated as a CFC, certain of our non-U.S. subsidiaries (if any) could be treated as CFCs as well. Moreover, if our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries (if any) could be treated as CFCs even if we were not treated as a CFC. A U.S. shareholder of a CFC may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by CFCs, regardless of whether we make any distributions. Failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. An individual that is a U.S. shareholder with respect to a CFC generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a U.S. shareholder that is a U.S. corporation. We cannot provide any assurances that we will assist investors in determining whether we or any of our non-U.S. subsidiaries (if any) are treated as CFCs or whether such investor is treated as a United States shareholder with respect to any such CFCs or that we will furnish to any U.S. shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A U.S. investor should consult its advisors regarding the potential application of these rules to an investment in our stock.

Agendia N.V. may not be eligible for treaty benefits based on bilateral tax treaties between the Netherlands and other jurisdictions.

It is intended that Agendia N.V. will be eligible for benefits under the bilateral tax treaties entered into between the Netherlands and other jurisdictions, notably the United States and Canada. To be eligible for tax treaty benefits, Agendia N.V. must first of all be tax resident of the Netherlands for the purpose of the applicable treaty. However, other requirements provided in the applicable tax treaty must be satisfied as well. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, or MLI, may modify, if applicable, such requirements. For example, the MLI introduces a “principal purpose test” clause, based on which treaty benefits can be denied if obtaining tax treaty benefits was the principal purpose or one of the principal purposes of the structure or transaction. Furthermore, the facts and circumstances relating to Agendia N.V.’s management and operations and the interpretation by relevant tax authorities and courts are relevant for the eligibility of Agendia N.V. for tax treaty benefits.

If we are not eligible for benefits under the relevant tax treaties between the Netherlands and other jurisdictions, significant adverse tax consequences could arise to Agendia for us.

We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. investors in the ordinary shares.

Based on the current and anticipated value of our assets, the anticipated frequency and magnitude of trading of our ordinary shares following the offering and the composition of our income, assets and operations, we do not expect to be a “passive foreign investment company,” or PFIC, for the current taxable year. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure that the U.S. Internal Revenue Service, or the IRS, will not take a contrary position. Furthermore, a separate determination must be made after the close of each taxable year as to whether we are a PFIC for that year. Accordingly, we cannot assure that we will not be a PFIC for our current taxable year or any future taxable year. A non-U.S. company will be considered a PFIC for any taxable year if (i) at least 75% of its gross income is passive income, or (ii) at least 50% of the value of its assets (generally based on quarterly averages during a taxable year) is attributable to assets that produce or are held for the production of passive income. For a corporation that is

 

88

considered to be a CFC, the determination of the value of its assets will generally be based on adjusted tax basis for taxable years in which such CFC’s shares are not treated as “publicly traded” for purposes of the PFIC rules, and will generally be based on fair market value for taxable years in which such CFC’s shares are treated as “publicly traded” for purposes of the PFIC rules. While there can be no assurance, we believe we are currently, and expect to be after this offering, treated as a CFC, and we anticipate our ordinary shares will be treated as publicly traded in our current taxable year for purposes of the PFIC rules. Accordingly, the value of our assets for purposes of the PFIC rules is expected to be based on fair market value for the current taxable year. Fair market value generally is determined by reference to the market price of our ordinary shares, which may fluctuate considerably. For purposes of the above calculations, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the equity. However, in the event any such corporations are CFCs that are not publicly traded (for purposes of the PFIC rules), the determination of the value of assets owned by such corporations will be based on their adjusted tax bases for the relevant taxable periods. If we were to be treated as a PFIC for any taxable year during which a United States Holder (as defined below under “Material Tax Considerations—Material United States Federal Income Tax Considerations for United States Holders”) holds an ordinary share, certain adverse U.S. federal income tax consequences could apply to such United States Holder. See “Material Tax Considerations—Material United States Federal Income Tax Considerations for United States Holders—Passive Foreign Investment Company Rules.”

Dividends distributed by us to certain related entities in low-taxed jurisdictions or non-cooperative jurisdictions for tax purposes might become subject to an additional Dutch withholding tax on dividends beginning in 2024.

We do not intend to pay any dividends on our ordinary shares for the foreseeable future (see “Risk Factors—We have never paid cash dividends on our ordinary shares and do not intend to do so”). However, if we do pay dividends on our ordinary shares, such dividends are generally subject to Dutch dividend withholding tax of 15% under the current Dutch Dividend Withholding Tax Act (Wet op de dividendbelasting 1965), unless certain exemptions apply for specific investors. See the section entitled “Material tax considerations—Material Dutch tax considerations—Withholding tax” for additional information.

On March 25, 2021, a legislative proposal was submitted to the Dutch parliament relating to the introduction of a Dutch conditional withholding tax on dividends (Wet invoering conditionele bronbelasting op dividenden). The legislative proposal introduces an additional withholding tax on, amongst others, dividends paid by a Dutch resident entity, such as us, in the event that the entity entitled to such payment (voordeelgerechtigde) is related to the payer and such related recipient entity (i) is resident in a low-taxed jurisdiction or a non-cooperative jurisdiction or (ii) has a permanent establishment in such jurisdiction to which the dividend payment is allocated. A jurisdiction qualifies as a low-taxed jurisdiction or a non-cooperative jurisdiction if it is listed in the annually updated Dutch ministerial decree (Regeling laagbelastende staten en niet-coöperatieve rechtsgebieden voor belastingdoeleinden) containing jurisdictions (a) with a statutory profit tax rate of less than 9% or (b) included on the European Union’s blacklist of non-cooperative jurisdictions in the preceding year. The conditional withholding tax on dividends may also apply in situations where structures are put in place with the main purpose or one of the main purposes to avoid the conditional withholding tax or in the event of a hybrid mismatch.

If the legislative proposal would be implemented in its current form, dividends distributed by us that fall in scope of the legislative proposal would become subject to a conditional withholding tax at a rate equal to the highest Dutch corporate income tax rate (currently 25%) at the time of the dividend distribution. Simultaneously, the ‘regular’ Dutch dividend withholding tax is anticipated to remain in place. In case of accumulation, the conditional withholding tax on dividends due will be reduced, but

 

89

not below zero, by any ‘regular’ Dutch dividend withholding tax withheld in respect of the same dividend payment, so that the overall effective rate of withholding of the regular Dutch dividend withholding tax and the additional Dutch dividend withholding tax in aggregate will not exceed the highest corporate income tax rate in effect at the time of the distribution. The legislative proposal is subject to amendment during the legislative. The legislative proposal has been approved as a formality by the House of Representatives on September 30, 2021, but still needs to be approved by the Senate before it can enter into force.

 

90

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.

Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various important factors, including, but not limited to, those identified under the section titled “Risk Factors” in this prospectus. Forward-looking statements include, but are not limited to, statements about:

 

•

estimates of our total addressable market and ability to serve those markets, future results of operations, financial position, research and development costs, capital requirements and our needs for additional financing;

 

•

our expectations about market and regulatory trends and our ability to capitalize on and effectively navigate those trends;

 

•

the impact on our business, financial condition and results of operation from the ongoing and global COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide;

 

•

estimates of demand and unmet needs within the medical community to functionally profile a woman’s breast cancer throughout the patient journey;

 

•

our ability to effectively and efficiently market and increase demand for our MammaPrint and BluePrint tests within the medical community and our targeted patient population;

 

•

our ability to obtain and maintain regulatory approval or clearance of our products and product candidates on expected timelines;

 

•

the rate and degree of market acceptance and clinical utility of our products and product candidates, if approved;

 

•

our ability to obtain and maintain coverage and reimbursement for our products and product candidates;

 

•

the performance of third parties in connection with the development of our products and product candidates, including third-party suppliers;

 

•

estimates of the comparative size and significance of our proprietary FLEX study and patient registry and our ability to leverage that data to advance the scientific frontier in breast cancer by commercializing solutions that improve patient outcomes and quality of life;

 

•

our ability to successfully grow our platform and develop and implement new solutions and techniques, including the commercialization of digital emulations of MammaPrint and BluePrint tests;

 

91

•

estimates of the insufficiencies of current breast cancer diagnostic and monitoring modalities and the value that our solutions can provide to physicians and patients;

 

•

our ability to successfully and efficiently grow our sales and marketing organizations, enhance broad awareness of our tests and provide quality clinical and customer support to physicians;

 

•

our ability to continue to operate and successful grow in a heavily regulated environment;

 

•

our ability to establish and maintain intellectual property protection and well as our ability to operate our business without infringing the intellectual property rights of others; and

 

•

our expectations regarding the use of proceeds from this offering.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

92

MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data in this prospectus from our own internal estimates and research as well as from industry and general publications and research, surveys and studies conducted by third parties. Industry publications, studies and surveys generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we are not aware of any misstatements regarding the market or industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

 

93

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $                , or                 , million if the underwriters exercise in full their option to purchase additional shares, assuming an initial public offering price per share of $                , which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and expenses of the offering that are payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease our net proceeds, after deducting the estimated underwriting discounts and commissions, by $                million, assuming that the number of ordinary shares offered by us, as set forth on the cover of this prospectus, remains the same. Each increase or decrease of 1,000,000 ordinary shares in the number of ordinary shares offered by us would increase or decrease our net proceeds, after deducting the estimated underwriting discounts and commissions, by approximately $                 million, assuming no change in the assumed initial public offering price per share.

We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, as follows:

 

•

approximately $19.3 million to satisfy our outstanding 9.5% Senior Secured Notes Due 2022 and other long-term liabilities;

 

•

approximately $                 to expand the scale and scope scale up of our commercial activities and build out our corporate commercial infrastructure and capabilities, including the hiring and training of sales and marketing personnel, to fund marketing initiatives and new product launches, and for the hiring and training of other commercial support personnel;

 

•

approximately $                 to fund and accelerate planned research and development initiatives focused on expanding clinical utility of our MammaPrint and Blueprint platform, completion of validation activities and regulatory processes for our NGS decentralized testing platform, the development of our Digital AI Pathology decentralized testing platform and development of our liquid biopsy offering; and

 

•

General working capital purposes including expanded expenditures relating to operating as a public company.

The expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. We may also use a portion of the net proceeds to in-license, acquire, or invest in additional businesses, technologies, products or assets, although currently we have no specific agreements, commitments or understandings in this regard. 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 closing of this offering or the amounts that we will actually spend on the uses set forth above. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

We believe the net proceeds of this offering together with our current cash and cash equivalents and expected cash generated from sales of our products will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through at least the next twelve months. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.

Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term interest-bearing obligations and certificates of deposit.

 

94

DIVIDEND POLICY

We have never paid or declared any dividends or other distributions on our ordinary shares, and we do not anticipate paying any dividends or other distributions on our ordinary shares in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and expansion of our business. Under Dutch law, a Dutch public company with limited liability (naamloze vennootschap) may only pay dividends or other distributions if the shareholders’ equity (eigen vermogen) exceeds the sum of the paid-up and called-up share capital plus the reserves required to be maintained by Dutch law or our Articles of Association. Under our Articles of Association, the board of directors may decide that all or part of the profits are carried to reserves. After reservation by the board of directors of any profit, the remaining profit will be at the disposal of the general meeting of shareholders. However, any future determination to pay dividends or other distributions to the holders of our ordinary shares can only be resolved upon by our general meeting upon the proposal of our board of directors. Any future proposal will depend upon the board of director’s review of a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the board of directors deems relevant. Any future debt or preference securities or future debt agreements we may enter may also preclude us from paying dividends.

We may pay dividends or make another distribution to our shareholders out of our profits or reserves after the adoption of our annual accounts demonstrating that such distribution is legally permitted. The board of directors may also, subject to certain requirements, declare interim dividends or other distributions out of any interim profits or reserves without the approval of the general meeting of shareholders. Pursuant to our Articles of Association, dividends and distributions may be made in cash, in kind or in the form of shares in our share capital.

Dividends and other distributions shall be made payable on the date determined by the board of directors. Claims to dividends and other distributions not made within five years from the date that such dividends or distributions became payable, will lapse and any such amounts will be considered to have been forfeited to us (verjaring).

 

95

CAPITALIZATION

The table below sets forth our cash and cash equivalents and capitalization as of June 30, 2021 derived from our financial statements included elsewhere in this prospectus:

 

•

on an actual basis;

 

•

on a pro forma basis to give effect to: (i) the conversion of all of our outstanding redeemable convertible preference shares into ordinary shares in connection with this offering, including the related issuance of                  ordinary shares to the holders of our outstanding redeemable convertible preference shares P in satisfaction of such holders’ right to a one-time distribution; (ii) the conversion of $35,000,000 aggregate principal of unsecured subordinated convertible promissory notes outstanding as of June 30, 2021, 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 (ii) the amendment of our Articles of Association as adopted by our general meeting of shareholders in connection with this offering; and

 

•

on a pro forma as adjusted basis to give further effect to the issuance and sale of                 ordinary shares in this offering at 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, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and our repayment of our note payable to related party upon its maturity as described in the section entitled “Use of Proceeds.”

The pro forma as adjusted information set forth in the table 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. Investors should read this table in conjunction with our financial statements included in this prospectus, as well as “Use of Proceeds,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

		As of June 30, 2021
(in thousands)		Actual				Pro Forma				Pro Forma As Adjusted(1)
Cash and cash equivalents		$	22,254
Notes payable to related party:
Senior note		$	11,747
Unsecured subordinated convertible promissory notes			31,522
Total notes payable to related party			43,269
Redeemable convertible preference shares			25,890
Shareholders’ equity (deficit):
Ordinary shares			9,232
Additional paid-in-capital			241,947
Accumulated deficit			(309,771	)
Accumulated other comprehensive loss			(2,850	)
Total shareholders’ equity (deficit)			(61,442	)
Total capitalization		$	7,717

 

(1)

A $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 the pro forma amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity (deficit) and total capitalization by approximately                million, assuming the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. An increase or

 

96

decrease of 1,000,000 shares in the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately                million, assuming no change 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, and after deducting the estimated underwriting discounts and commissions.

If the underwriters’ option to purchase additional ordinary shares from us is exercised in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity, total capitalization and ordinary shares outstanding as of June 30, 2021 would be $                , $                , $                , $                 and                 , respectively.

The number of our ordinary shares shown as outstanding in the table above excludes:

 

•

15,160,670 ordinary shares issuable upon the exercise of options to purchase our ordinary shares outstanding as of June 30, 2021 at a weighted average exercise price of €0.5942 per share;

 

•

206,000 ordinary shares issuable upon the exercise of options to purchase our ordinary shares granted subsequent to June 30, 2021 at a weighted average exercise price of €2.56 per share;

 

•

100,002 ordinary shares issuable upon the exercise of warrants outstanding as of June 30, 2021 at an exercise price of €20.00 per share;

 

•

1,043,299 ordinary shares reserved for future issuance under our 2015 Stock Incentive Plan, provided that we will cease granting awards under this plan upon the effectiveness of the 2021 Plan and 2021 ESPP;

 

•

ordinary shares reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering; and

 

•

ordinary shares reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering.

 

97

DILUTION

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

As of June 30, 2021, we had a historical net tangible book deficit of $61.5 million, or $0.61 per ordinary share. Net tangible book deficit per ordinary share represents the amount of our total tangible assets less our total liabilities and redeemable convertible preference shares divided by the total number of our ordinary shares outstanding as of June 30, 2021.

Our pro forma net tangible book value as of June 30, 2021 was approximately $                 million, or $                 per ordinary share. Pro forma net tangible book value represents the amount of our total tangible assets less our liabilities, after giving effect to (i) the conversion of all of our outstanding redeemable convertible preference shares into ordinary shares in connection with this offering, including the related the issuance of                  ordinary shares to the holders of our outstanding redeemable convertible preference shares P in satisfaction of such holders’ right to a one-time distribution; and (ii) the conversion of $35,000,000 aggregate principal of unsecured subordinated convertible promissory notes outstanding as of June 30, 2021, 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 giving further effect to the issuance and sale by us of                 ordinary shares in this offering at 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, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at June 30, 2021 would have been approximately $                 million, or $                 per ordinary share. This represents an immediate increase in net tangible book value of $                 per ordinary share to existing shareholders and an immediate dilution of $                 per ordinary share to new investors purchasing ordinary shares in this offering at the assumed initial public offering price. Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per ordinary share after this offering from the assumed initial public offering price per ordinary share paid by new investors.

The following table illustrates this dilution to new investors purchasing ordinary shares in the offering.

 

Assumed initial public offering price		$
Historical net tangible book value per ordinary share
Increase in net tangible book value per share attributable to the pro forma adjustments described above
Pro forma net tangible book value per share at June 30, 2021
Increase in pro forma as adjusted net tangible book value per ordinary share attributable to new investors purchasing ordinary shares in this offering
Pro forma as adjusted net tangible book value per ordinary share after this offering
Dilution per ordinary share to new investors
Percentage of dilution in net tangible book value per ordinary share for new investors				%

If the underwriters exercise their option to purchase additional ordinary shares in full, our pro forma as adjusted net tangible book value per ordinary share after this offering would be $                 per ordinary share, representing an immediate increase in pro forma as adjusted net tangible book value per share of $                 per ordinary share to existing shareholders and immediate dilution of $                 per ordinary share in pro forma as adjusted net tangible book value per ordinary share to

 

98

new investors purchasing ordinary shares in this offering, based on an assumed initial public offering price of $                 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus.

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, respectively, would increase or decrease the pro forma as adjusted net tangible book value after this offering by $                 per ordinary share and the dilution per share to new investors in the offering by $                 per ordinary share, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase of 1,000,000 in the number of ordinary shares we are offering would increase the pro forma as adjusted net tangible book value per ordinary share after this offering by $                 and decrease the dilution per ordinary share to new investors participating in this offering by $                , assuming no change in the assumed initial public offering price per share and after deducting the estimated underwriting discounts and commissions. A decrease of 1,000,000 in the number of ordinary shares we are offering would decrease the pro forma as adjusted net tangible book value per ordinary share after this offering by $                 and increase the dilution per ordinary share to new investors participating in this offering by $                , assuming no change in the assumed initial public offering price per ordinary share and after deducting the estimated underwriting discounts and commissions.

The following table summarizes, on the pro forma as adjusted basis described above, the number of ordinary shares purchased from us, the total consideration paid to us and the average price per ordinary share paid by existing shareholders and by new investors purchasing ordinary shares in this offering. The calculation below is based on an assumed initial public offering price of $                 per ordinary 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:

 

		Ordinary Shares purchased								Total consideration								Average price per share
		Number				Percent				Amount				Percent
Existing shareholders								%		$						%		$
New investors
Total							100	%		$					100	%		$

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per ordinary 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 by $                 million and, in the case of an increase, would increase the percentage of total consideration paid by new investors by approximately     percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by approximately     percentage points, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. An increase or decrease of 1,000,000 in the number of ordinary shares we are offering would increase or decrease the total consideration paid by new investors by                 and, in the case of an increase, would increase the percentage of total consideration paid by new investors by     percentage points and, in the case of a decrease, would decrease the percentage of total consideration paid by new investors by     percentage points, assuming no change in the assumed initial public offering price per share.

 

99

If the underwriters exercise their option to purchase additional ordinary shares in full, the following will occur:

 

•

the percentage of our ordinary shares held by existing shareholders will decrease to approximately     % of the total number of our ordinary shares outstanding after this offering; and

 

•

the percentage of our ordinary shares held by new investors will increase to approximately     % of the total number of our ordinary shares outstanding after this offering.

The tables above are based on ordinary shares outstanding as of June 30, 2021, after giving effect to (i) the conversion of all of our outstanding redeemable convertible preference shares into ordinary shares in connection with this offering, including the related issuance of                  ordinary shares to the holders of our outstanding redeemable convertible preference shares P in satisfaction of such holders’ right to a one-time distribution and (ii) the conversion of $35,000,000 aggregate principal of unsecured subordinated convertible promissory notes outstanding as of June 30, 2021, 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 excludes the following:

 

•

15,160,670 ordinary shares issuable upon the exercise of options to purchase our ordinary shares outstanding as of June 30, 2021 at a weighted average exercise price of €0.5942 per share;

 

•

206,000 ordinary shares issuable upon the exercise of options to purchase our ordinary shares granted subsequent to June 30, 2021 at a weighted average exercise price of                  per share;

 

•

100,002 ordinary shares issuable upon the exercise of warrants outstanding as of June 30, 2021 at an exercise price of €20.00 per share;

 

•

1,043,299 ordinary shares reserved for future issuance under our 2015 Stock Incentive Plan, provided that we will cease granting awards under this plan upon the effectiveness of the 2021 Plan and 2021 ESPP;

 

•

ordinary shares reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering; and

 

•

ordinary shares reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering.

 

100

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data together with our financial statements and the related notes thereto included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus. We have derived the consolidated statements of operations and comprehensive loss data for the six months ended June 30, 2021 and 2020 from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state our results of operations for the six months ended June 30, 2021 and 2020 and financial position as of June 30, 2021. We have derived the Consolidated Statements of Operations and Comprehensive Loss data for the years ended December 31, 2020 and 2019 and the balance sheet data as of December 31, 2020 and 2019 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that should be expected in the future, and the results of operations for the six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021, or any other future period.

 

		Six Months Ended June 30,								Year Ended December 31,
(In thousands, except share and per share data)		2021				2020				2020				2019
		(unaudited)
Consolidated statements of operations and comprehensive loss data:
Revenue		$	29,735			$	26,741			$	57,893			$	48,936
Operating expenses:
Cost of revenue			7,629				7,060				14,858				13,015
Research and development			8,848				7,105				15,090				8,830
Selling and marketing			13,554				13,755				27,694				25,562
General and administrative			13,767				8,315				18,992				22,112
Loss from operations			(14,063	)			(9,494	)			(18,741	)			(20,583	)
Other income (expense):
Interest expense (including interest on related party loans of $765 and $595)			(824	)			(666	)			(1,382	)			(1,362	)
Loss on extinguishment of notes payable to related parties			(1,129	)			—				—				—
Change in fair value of convertible notes payable to related parties			(22	)			—				—				—
Other income (expense), net			(671	)			50				158				(393	)
Total other income (expense)			(2,646	)			(616	)			(1,224	)			(1,755	)
Net loss		$	(16,709	)		$	(10,110	)		$	(19,965	)		$	(22,338	)
Other comprehensive loss:
Foreign currency translation adjustment			765				713				(1,355	)			(4	)
Total comprehensive loss		$	(15,944	)		$	(9,397	)		$	(21,320	)		$	(22,342	)
Net loss per share attributable to ordinary shareholders, basic and diluted		$	(0.17	)		$	(0.11	)		$	(0.22	)		$	(0.29	)

 

101

		Six Months Ended June 30,								Year Ended December 31,
(In thousands, except share and per share data)		2021				2020				2020				2019
		(unaudited)
Weighted-average ordinary shares outstanding, basic and diluted			100,511,465				88,916,238				91,877,009				76,081,835
Pro forma net loss per share attributable to ordinary shareholders, basic and diluted (1)		$								$
Pro forma weighted-average shares outstanding, basic and diluted (1)

 

(1)

Pro forma basic and diluted net loss per share attributable to ordinary shareholders has been prepared to give effect to adjustments to our capital structure arising in connection with the completion of this offering and is calculated by dividing the pro forma net loss attributable to ordinary shareholders by the pro forma weighted-average ordinary shares outstanding for the period. Pro forma net loss attributable to ordinary shareholders is computed as net loss attributable to ordinary shareholders adjusted for the distribution to the redeemable convertible preference shares of their liquidation preference for each period presented. Pro forma weighted-average ordinary shares outstanding is computed by adjusting the weighted-average ordinary shares outstanding to give pro forma effect to the conversion of all shares of our preference shares outstanding as of June 30, 2021 and December 31, 2020, respectively, into ordinary shares as if this offering had occurred at the beginning of the earliest reporting period shown. Pro forma basic and diluted net loss per share attributable to ordinary shareholders does not include the effect of the shares expected to be sold in this offering.

 

The following table sets forth the computation of pro forma basic and diluted net loss per share attributable to ordinary shareholders giving effect to the aforementioned conversion of all outstanding shares of our redeemable convertible preference shares into ordinary shares for the six months ended June 30, 2021 and year ended December 31, 2020:

 

(in thousands, except share and per share data)		Six months ended June 30, 2021				Year ended December 31, 2020
Numerator:
Net loss attributable to ordinary shareholders, basic and diluted		$	(16,709	)		$	(19,965	)
Distribution to redeemable convertible preference shares
Net loss used in computing pro forma net loss attributable to ordinary shareholders, basic and diluted		$				$
Denominator:
Weighted-average shares used to compute net loss per ordinary share, basic and diluted			100,511,465				91,877,009
Pro forma adjustment to reflect assumed conversion of redeemable convertible preference shares into ordinary shares
Shares used in computing pro forma net loss attributable to ordinary shareholders, basic and diluted
Pro forma net loss per share attributable to ordinary shareholders, basic and diluted		$				$

 

102

		As of				As of December 31,
(in thousands)		June 30, 2021				2020				2019
		(unaudited)
Consolidated Statement of Financial Position Data:
Cash and cash equivalents		$	22,254			$	7,724			$	8,138
Total assets			39,168				26,814				25,033
Total liabilities			74,720				47,105				35,092
Redeemable, convertible preference shares			25,890				25,890				25,890
Accumulated deficit			(309,771	)			(293,062	)			(272,284	)
Total shareholders’ deficit			(61,442	)			(46,181	)			(35,949	)

 

103

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. This discussion contains forward looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk factors” and in other parts of this prospectus.

Business overview

We are a mission-driven, commercial stage company focused on leading state-of-the-art decision making utilizing next generation diagnostic and information solutions that improve outcomes for breast cancer patients worldwide. Our comprehensive platform applies the power of functional genomic to guide the treatment of people throughout their patient journey, from initial diagnosis through remission and cure, or progression to metastatic disease. Our approach takes a holistic view of the biology underlying an individual patient’s breast cancer to enable accurate classification of personalized breast cancer types. We offer two proprietary tests: MammaPrint and BluePrint. MammaPrint is a 70-gene prognostic test that stratifies a specific patient’s recurrence risk and informs the benefit of chemotherapy and endocrine therapy. BluePrint is an 80-gene molecular subtyping test that identifies the underlying biology of an individual breast cancer tumor, and classifies the tumor to provide information about its behavior, long-term prognosis and potential response to systemic therapy. Our array of service offerings platform continues to yield new disease insights and clinical utility in successive studies due to its comprehensive design, which we expect will expand our addressable markets. In both pre- and post-operative settings, our platform provides clinically actionable insights that help guide optimal treatment decisions along the continuum of care. To engage breast cancer patients across this journey, we are clinically validating and readying to commercialize a breast cancer-specific liquid biopsy test for minimal residual disease, or MRD, to monitor circulating tumor DNA, or ctDNA, for cancer clearance or recurrence. Our objective with serial liquid biopsy monitoring is to intercept cancer recurrence early and to end the progression of breast cancer to metastatic disease. We are also developing a Smart Pathology^™ solution to guide treatment decisions in metastatic breast cancer. We continue to advance our solutions with innovative analytical modalities such as whole genome arrays, next generation sequencing, or NGS, and digital AI pathology. Our commitment to breast cancer, inclusion in top-tier medical guidelines, and broad reimbursement, together with our operational and commercial excellence, has accelerated revenue to $29.7 million for the six months ended June 30, 2021 and $57.9 million for the year ended December 31, 2020, improved gross margins to 74% for the first halves of 2021 and 2020 and improved comprehensive loss to $15.9 million for the six months ended June 30, 2021 and $21.3 million for the year ended December 31, 2020. We believe these are durable business attributes that have enabled us to impact the lives of women with breast cancer around the world.

We commercialize our solutions through our worldwide integrated sales organization, which is composed of specialized sales representatives, clinical and customer support, and a broad network of experienced distribution partners. In North America, we employ a clinically and strategically focused sales team across six regions. We go-to-market in Europe, the Middle East and Africa, or EMEA, through a blended approach of utilizing both direct sales and experienced distribution partners. We have achieved significant growth in the Asian market over the past three years with eight distribution partners. Outside the United States, we have further enabled growth with an NGS-based decentralized testing option.

Adoption and utilization of our tests is highly dependent on reimbursement from third-party payors, which include government payors, such as Medicare and Medicaid and commercial payors, such as

 

104

Aetna, Cigna, United Healthcare and Blue Cross Blue Shield. Most national and regional third-party payors in the United States, along with the designated regional Medicare Administrator Contractor for our tests, have issued positive coverage determinations for our MammaPrint test for patients with invasive disease through contracts, agreements or policy decisions. The local carrier with jurisdiction for claims submitted by us for Medicare patients, MolDX, also provides coverage for our invasive breast cancer test for estrogen receptor protein positive, or ER+, patients with Lymph Node positive, or LN+, disease (up to three positive lymph nodes) and invasive breast cancer patients where a lymph node status is unknown or when the test is used to guide neoadjuvant treatment decisions. Additionally, some payors provide policy coverage for the use of our test in ER+ patients with LN+ disease, including lymph node micro metastasis. However, we may not be able to obtain coverage and reimbursement from other payors for our test for breast cancer patients with LN+, ER+ disease. Expanding criteria and maintaining broad coverage and reimbursement of our MammaPrint test by third-party payors are key components of our financial success. Obtaining and securing coverage by government, commercial and private payors, for our pipeline tests and solutions products will be important over time. As of June 30, 2021, we have obtained reimbursement coverage for approximately 246 million covered lives in the United Stated for MammaPrint, inclusive of Medicare, commercial and private payors.

MammaPrint is offered internationally through direct sales, our network of 34 distributors in EMEA, North America, Latin America and Asia-Pacific, or APAC, and Agendia NGS certified partner reference laboratories. We expect to continue to focus substantial resources on pursuing global adoption of and reimbursement for our MammaPrint test. Although reimbursement remains an important aspect of adoption, we have also made significant progress in self-pay APAC markets, specifically China and Korea. In Europe, reimbursement through government programs remains an important facet for the adoption of our tests. We recently secured reimbursement in Germany, Canada, and Italy. In addition to access and reimbursement progress, our decentralized NGS version of MammaPrint affords the opportunity to access patient cohorts in jurisdictions, such as China and Germany, that are sensitive to patient samples, data and information leaving the jurisdiction. China represents a large and growing market for our NGS emulation of MammaPrint and BluePrint.

We continue to pursue access and reimbursement for BluePrint. We receive full or partial reimbursement for BluePrint only on a limited basis from non-contracted carriers in the United States.

We perform all MammaPrint and BluePrint tests, other than NGS tests, at our clinical laboratory located in Irvine, California, which comprises approximately 13,000 square feet and has capacity for up to 140,000 tests per year. The laboratory is College of American Pathologist, or CAP-accredited, Clinical Laboratory Improvement Amendments, or CLIA-certified, International Organization for Standardization, or ISO, 13485:2016 Quality Management Systems – Requirements for Regulatory Purposes for Medical Devices certified, as well as permitted and licensed by both the California Department of Public Health, or CDPH, and New York State Department of Health, or NYSDOH. We source our NGS Kits from third-party suppliers, including Agilent Inc.

We incurred net losses of $20.0 million and $22.3 million for the years ended December 31, 2020 and 2019, respectively. We also incurred a net loss of $16.7 million and $10.1 million for the six months ended June 30, 2021 and 2020, respectively, and had an accumulated deficit of $309.8 million and $283.2 million as of June 30, 2021 and 2020. We have funded our operations to date principally from the sale of redeemable convertible preference shares, ordinary shares, revenue from precision oncology testing and development services and the incurrence of indebtedness.

We expect to incur net losses for the next several years as we intend to continue to make significant investments in our sales and marketing organization, expand international marketing programs, investments in research and development, regulatory affairs and clinical studies to develop our product candidates, support regulatory submissions and demonstrate the clinical efficacy of our

 

105

product candidates. Moreover, we expect to incur additional expenses as a result of operating as a public company, including legal, accounting, insurance, exchange listing and SEC compliance, investor relations, and other administrative and professional services expenses. As a result of these and other factors, we will require additional financing to fund our operations and planned growth.

As of June 30, 2021, we had cash and cash equivalents of $22.3 million. We believe, based on our current operating plan, that our existing cash and cash equivalents will not be sufficient to meet our capital requirements and fund our operations for at least the next twelve months. Management believes that this raises substantial doubt about our ability to continue as a going concern. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements for at least the next twelve months. We may also seek additional financing opportunistically. We may seek to raise any additional capital by entering into partnerships or through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources. If we raise additional funds by issuing equity securities, our shareholders may experience dilution. At this time, we do not have plans or intentions to raise additional funds by way of the sale of additional securities, other than pursuant to this offering.

Factors affecting our performance

We believe there are several important factors that have impacted and that we expect will impact our operating performance and results of operations, including:

 

•

The acceptance of, and level of demand for, our MammaPrint and BluePrint tests within the medical community and our targeted patient populations.

 

•

The extent to which our solutions are included in healthcare guidelines and recommended in the United States and abroad by entities such as the American Society of Clinical Oncology, National Comprehensive Cancer Network, and European Society for Medical Oncology.

 

•

Our ability to maintain and expand coverage and reimbursement under government healthcare programs and by third-party payors within the United States and abroad.

 

•

Fluctuations in the pricing of our tests, reimbursement rates and payor mix.

 

•

Our ability to expand and grow through the introduction of additional delivery channels, including decentralized testing.

 

•

Whether our continuing research and development activities are successful, including clinical trials to expand our platform and utility of our solutions.

 

•

Our ability to successfully expand our sales and operations outside the United States.

 

•

Whether we are able to attract and retain new and existing skilled personnel.

 

•

Our ability to obtain supplies from a limited number of, and in certain instances, sole suppliers.

 

•

The success of our strategic partnerships.

 

 

106

Test Volumes

Growth in test volumes and increasing sales and utilization of NGS Kits have been, and we expect will continue to be, the primary drivers in the growth of our revenue. Centralized microarray volumes reflect MammaPrint tests performed in our centralized CLIA lab. We can provide both MammaPrint and BluePrint results off of a single microarray sequencing reaction. MammaPrint and BluePrint are processed simultaneously using the same sample on the same subarray. Post sequencing of the patient sample, we read the 70-MammaPrint genes to render a MammaPrint result and 80-Blueprint genes to render a BluePrint result. Approximately 85% of orders for a MammaPrint test have a BluePrint order attached. BluePrint is not offered separately from MammaPrint.    

 

		Six Months Ended June 30,																Year Ended December 31,
		2021				2020				Change				% Change				2020				2019				Change				% Change
Centralized Microarray Tests
United States			8,703				7,789				914				12	%			16,543				13,910				2,633				19	%
International			3,683				3,049				634				21	%			6,270				6,103				167				3	%
Decentralized NGS
NGS Kits			116				49				67				137	%			170				137				33				24	%
NGS Tests			1,856				784				1,072				137	%			2,720				2,192				528				24	%
Total Test Volume			14,242				11,622				2,620				23	%			25,533				22,205				3,328				15	%

Test volume increases in the United States reflect the results of our ongoing focused sales effort and increased acceptance of MammaPrint. For NGS, we measure volume based on NGS Kits sold, which are comprised of the reagents and a tray capable of processing 16 patient samples per NGS Kit. Each kit is accompanied by a token that enables authorized access to our cloud based Agendia Data Analysis Pipeline Tool, or “ADAPT” to generate the MammaPrint and BluePrint results. NGS Tests presented above represent the maximum potential tests run from each kit sold. We do not offer refunds or credits for unused tests in an NGS Kit. NGS volumes increased for the six months ended June 30, 2021 and year-over-year principally due to increased utilization in China, a market in which samples are not permitted to leave the country.

Impact of COVID-19

The World Health Organization classified the COVID-19 outbreak as a pandemic in March 2020. In the following weeks, the United States, Netherlands and other countries implemented shelter in place guidelines and advised non-essential businesses to close. Breast cancer surgery, treatment and testing were not classified as elective procedures. As such, our tests were classified as non-elective and an essential business.

COVID-19 disrupted and continues to disrupt our business as access to clinicians and clinics have been restricted by COVID-19 protocols restricting non-patient access to clinics and clinicians combined with closures and reduced rates at mammography testing sites may continue to disrupt our business. The ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the pandemic, third-party actions taken to contain its spread and mitigate its public health effects and short- and long-term changes in the behaviors of medical professionals and patients resulting from the pandemic.

See the section titled “Risk factors” for further discussion of the possible impact of the COVID-19 pandemic on our business.

 

107