prog-10k_20201231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 001-39334

 

PROGENITY, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

27-3950390

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

4330 La Jolla Village Drive, Suite 200, San Diego, CA

92122

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (855) 293-2639

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

PROG

 

The Nasdaq Global Market

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  NO 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  YES  NO 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  NO 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  YES  NO 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  NO 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The Nasdaq Stock Market on June 30, 2020, was approximately $95,918,409.

The number of shares of Registrant’s Common Stock outstanding as of February 28, 2021 was 60,251,833.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

 


 

Table of Contents

 

 

 

Page

PART I

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

48

Item 1B.

Unresolved Staff Comments

97

Item 2.

Properties

97

Item 3.

Legal Proceedings

97

Item 4.

Mine Safety Disclosures

100

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

101

Item 6.

Selected Financial Data

101

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

102

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

117

Item 8.

Financial Statements and Supplementary Data

118

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

154

Item 9A.

Controls and Procedures

154

Item 9B.

Other Information

154

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

155

Item 11.

Executive Compensation

159

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

164

Item 13.

Certain Relationships and Related Transactions, and Director Independence

167

Item 14.

Principal Accounting Fees and Services

171

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

172

Item 16

Form 10-K Summary

175

 

 

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, or Annual Report, contains “forward-looking statements” within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties and are based on estimates and assumptions. All statements, other than statements of historical facts included in this Annual Report, including statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, financing needs, plans or intentions relating to products and markets, and business trends and other information referred to under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan,” “anticipate,” “target,” “forecast” or the negative of these terms, and similar expressions intended to identify forward-looking statements. Forward-looking statements are not historical facts, and reflect our current views with respect to future events. Given the significant uncertainties, you should not place undue reliance on these forward-looking statements.

There are a number of risks, uncertainties, and other factors that could cause our actual results to differ materially from the forward-looking statements expressed or implied in this Annual Report. Such risks, uncertainties, and other factors include, among others, the following risks, uncertainties, and factors:

 

 

 

the recent and ongoing COVID-19 pandemic and associated shelter-in-place orders;

 

 

 

our ability to develop and commercialize molecular testing products as well as innovate in the field of precision medicine;

 

 

 

the size and growth potential of the markets for our products and product candidates, and our ability to serve those markets;

 

 

 

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

 

 

 

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;

 

 

 

regulatory developments in the United States and foreign countries;

 

 

 

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

 

 

 

our ability to improve and enhance our current products and product candidates;

 

 

 

our plans to research, develop, and commercialize new products and product candidates;

 

 

 

the development, regulatory approval, efficacy, and commercialization of competing products;

 

 

 

the outcome of pending investigations and legal proceedings;

 

 

 

the loss or retirement of key scientific or management personnel;

 

 

 

our ability to develop and maintain our corporate infrastructure, including maintaining effective internal control;

 

 

 

our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing; and

 

 

 

our expectations regarding our ability to obtain and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing the intellectual property rights of others.

There may be other factors that cause our actual results to differ materially from the forward-looking statements expressed or implied in this Annual Report, including factors disclosed in the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referred to above and elsewhere in this prospectus may not contain all of the risks, uncertainties, and other factors that may affect our future results and operations. Moreover, new risks will emerge from time to time. It is not possible for our management to predict all risks. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected.

2


All forward-looking statements in this Annual Report apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Annual Report. Except as required by law, we disclaim any intent to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

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PART I

In this Annual Report, “Progenity,” “we,” “us” and “our” refer to Progenity, Inc., and our wholly-owned subsidiaries on a consolidated basis, unless the context otherwise provides.

Item 1. Business.

Overview

We are a biotechnology company with an established track record of success in developing and commercializing molecular testing products as well as innovating in the field of precision medicine. We believe that we are a market-leading provider of in vitro molecular tests designed to improve lives by providing actionable information that helps guide patients and physicians in making critical and timely medical decisions during various life stages, such as family planning, pregnancy, or navigating a complex disease diagnosis. Our vision is to transform healthcare to become more precise and personal by improving diagnoses of disease and improving patient outcomes through localized treatment with targeted therapies. We apply a multi-omics approach, combining genomics, epigenomics, proteomics, and metabolomics, to our molecular testing products and to the development of a suite of investigational ingestible devices and drug/device combinations designed to provide precise diagnostic sampling and drug delivery solutions.

Our internal core competencies, deep research and development pipeline and strategic acquisitions of novel technologies have fueled our innovation in women’s health, supporting the development and launch of complementary molecular testing products that inform critical healthcare decision-making across a woman’s lifetime.

In 2015, we launched both our Innatal Prenatal Screen, a Non-Invasive Prenatal Testing, or NIPT, offering, and our Preparent Carrier Test, followed by the launch of our Riscover Hereditary Cancer Test in 2017. We offer molecular tests with market-leading performance and turnaround times, supported by end-to-end workflow solutions that increase administrative efficiencies. Along with our comprehensive menu of molecular tests, we offer patients pre-test education, clear and timely results, and on-demand genetic counseling. We are committed to providing patients and physicians with empathetic communication and support during critical moments to help empower and prepare patients and their families to make critical life decisions.

Since our inception, we have accessioned approximately 2.0 million tests in the United States. Beginning in March 2020, we began to observe declines in the volumes of both our molecular tests and the pathology tests conducted by Avero Diagnostics due to the impact of the COVID-19 pandemic and resulting work-from-home policies and other operational limitations mandated by federal, state and local governments. However, we believe our business is resilient and we observed positive signs of recovery in the second half of 2020. While we have implemented and continue to monitor our mitigation strategies to address these limitations, such as supporting patients and physicians virtually and offering COVID-19 PCR testing, there can be no assurance that the rate of decline in our testing volumes will not continue or accelerate in future periods. Our current assessment of the impact of the COVID-19 pandemic is that our NIPT test volumes have proved more resilient than our carrier screening test volumes; however, the comparative impact may continue to change over time.

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Test Volume

 

Our commercial team of more than 150 individuals actively engages with physicians and their staff to emphasize the clinical need for our products, educate them on clinical value, and facilitate their ability to order our molecular tests. We place special emphasis on our customers’ needs and journey with their patients. We ensure they are fully equipped with all the tools they need to discuss and educate their patients about the benefits of NIPT, carrier screening, and hereditary cancer screening, and also provide the added confidence that our genetic counselors are there to support them when needed.

We continue to innovate to drive the clinical and competitive differentiation of our molecular tests. For example, our next generation Innatal Prenatal Screen (Innatal 4th Generation) is designed to provide the same highly reliable results but with a faster turnaround time and at a much lower cost to us.

We are developing a rule-out test for preeclampsia, branded as Preecludia™. Based on our estimates, annually, over 700,000 pregnant women in the United States experience signs and symptoms that could be attributed to preeclampsia, which can cause serious, even fatal, complications for both mother and baby. Preeclampsia is the second most common cause of maternal death worldwide and is currently diagnosed by observing risk factors and common symptoms, such as high blood pressure, rather than diagnosing the actual condition itself. This approach often leads to false positive diagnoses and provides limited clinical utility, which can each lead to unnecessary hospitalizations and medical costs. We are developing a test that we believe has the potential to address these shortcomings by ruling out the condition itself (rather than merely detecting its symptoms) through testing for certain biomarkers. We believe that identifying non-preeclamptic pregnancies would improve patient outcomes while lowering the cost burden of preeclampsia to the U.S. healthcare system. We believe the total addressable market for our preeclampsia test is up to $3 billion per year in the United States alone.

We believe our future success will be driven by continued capture of market share by our molecular testing business and new revenue streams resulting from our diversified product development pipeline, both within and beyond women’s health. Our core expertise in complex assay development, bioinformatics, and scalable commercial laboratory operations lends itself to a variety of potential applications. We are also developing a novel pipeline of precision medicine product candidates designed to provide solutions for gastrointestinal, or GI, disorders. This pipeline includes both diagnostic applications, targeted drug delivery in the GI tract at the site of disease, and the oral delivery of biologics. We believe these product candidates, if successfully developed, have the potential to address unmet healthcare needs by more precisely identifying and treating chronic GI diseases, such as small intestinal bacterial overgrowth, or SIBO, and inflammatory bowel disease, or IBD. We are also developing an epigenetics platform designed to assess the global, regional, and site-specific methylation information of the genome at low cost that is intended to be an alternative to onerous, costly whole-genome bisulfite sequencing and enable more rapid diagnostic product development.

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Product and Product Candidate Overview

We support patients and physicians during patients’ critical life decisions with our current suite of high-quality molecular tests:

 

 

 

Product

 

Description

 

 

 

A noninvasive prenatal test offered to women early in pregnancy to screen for risk of fetal chromosomal conditions, such as Down syndrome, trisomy 13, and trisomy 18, and sex chromosome disorders

 

Commercialized in 2015

 

 

An expanded carrier screen that is performed on women or couples before conception or early in a pregnancy to identify if they carry certain mutations that cause genetic diseases

 

Commercialized in 2015

 

 

A hereditary cancer screen that looks for genetic mutations associated with elevated risk for certain hereditary cancers in an asymptomatic patient

 

Commercialized in 2017

 

 

A test for monogenic diseases that is the first commercially available, custom-designed solution for families at-risk for rare diseases

 

Commercialized in 2019

 

 

A test for symptomatic women suspected of developing preeclampsia during their pregnancy designed to rule out preeclampsia as the cause for the symptoms

 

In Development

 

 

Anatomic and Molecular Pathology Tests

A broad portfolio of anatomic and molecular pathology tests and specialized genetic tests we offer through Avero Diagnostics

 

Acquired in 2015


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We are also developing a proprietary ingestible capsule platform designed to help diagnose and treat GI disorders at the site of disease, with the goal of addressing significant unmet needs and supporting affected patient populations by improving patient outcomes through precision medicine. Our investigational capsules are being developed for both diagnostic and therapeutic applications in disorders such as SIBO and IBD. Our precision medicine development pipeline includes:

 

 

 

(1) 

We cannot predict whether the COVID-19 pandemic or other factors will impact the timing of our clinical trials and studies. For example, see “Risk Factors—The recent and ongoing COVID-19 pandemic could materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our business could be adversely affected by the effects of other future health epidemics or pandemics in regions where we or third parties on which we rely have significant business operations.”

Our Strengths

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

 

A leading molecular testing business with clinical and competitive product advantages.    Our products are built on a foundation of molecular genetic expertise, excellence in bioinformatics, and dedication to women’s health and reproductive medicine. We have built a robust product portfolio through efficient in-house development, clinical laboratory partnerships, and strategic acquisitions. Our tests have achieved market-leading reliability and performance benchmarks within their respective market categories.

 

Integrated product offering.    We offer integrated molecular tests and end-to-end support services that enable physicians to seamlessly incorporate genetic testing into their office workflow and offer the convenience of ordering multiple tests from one source. Our workflow solutions customize the experience of working with us for a range of physician practice sizes and capabilities, lowering barriers to adoption of genetic testing. We also utilize a specialized team dedicated to integrating our systems with our healthcare providers’ electronic medical record, or EMR, systems, opening bidirectional connectivity to streamline test ordering and reporting. We deliver easy-to-

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understand results and our customer support services provide convenient access to board-certified genetic counselors. We believe that these services collectively create substantial value and lead to customer loyalty.

 

Breadth and depth of R&D capabilities driving breakthrough innovation.    We have built a first class research and development, or R&D, organization capable of harnessing and translating novel technologies into innovative platforms and product solutions as we strive to remain at the forefront of customer needs. Our technical expertise along the product development spectrum includes assay design, bioinformatics, and analytical and clinical validation and enables us to leverage existing knowledge to solve new challenges.

 

Precision medicine platform targeting a large, underserved market.    We are developing an innovative and potentially scalable product platform that we believe will support the advancement of our precision medicine pipeline. This platform approach is based on an innovative capsule, which we believe could represent a paradigm shift from existing diagnostic and therapeutic approaches. We believe this platform has the potential to address significant unmet medical needs in the GI space, including the challenges in diagnosing, treating, and monitoring diseases without the repeated use of invasive procedures, such as upper GI endoscopies, colonoscopies, and biopsies.

 

Comprehensive intellectual property portfolio.    We have retained worldwide rights to our internally-developed and acquired molecular testing and precision medicine technologies. We hold the rights to over 600 issued patents and pending patent applications that include claims that are directed to a range of molecular testing and precision medicine-related methods, systems, and compositions surrounding our suite of current and future products. In addition, we believe that our trade secrets and other know-how provide additional barriers to entry.

 

Proven leadership with industry expertise.    Our senior management team and board of directors consist of veteran biotechnology and molecular testing professionals with deep industry experience. These individuals have extensive experience with numerous well-regarded biotechnology and diagnostic companies. Through their many years of experience, they have developed strong relationships with key thought leaders and medical societies.

Our Strategy

Our vision is to build upon our expertise and core competencies in molecular testing to transform healthcare to become more precise and personal in our existing markets as well as in new developmental fields such as ingestible diagnostics and targeted therapeutics. To realize our vision, we intend to:

 

Expand market opportunity for our existing molecular tests.    We believe there is a significant opportunity to expand and further penetrate the markets for each of our existing molecular tests. We intend to accomplish this by working with industry groups and payors to increase payor policy coverage, educating patients, physicians, and payors on the clinical utility of our tests, and highlighting the cost efficiency and time savings provided by our tests and workflow solutions.

 

Leverage our robust R&D capabilities to drive breakthrough innovation.    We seek to combine innovation with the technologies underlying our existing platforms to disrupt the current diagnostics and treatment paradigms. Through our robust research and development pipeline, we seek to unlock novel approaches that will drive improvement of patient outcomes in prenatal and perinatal medicine, gastroenterology, and oncology, increase the precision of medical research and diagnosis through ingestible sampling technologies, and create a new category of treatment options through proprietary drug/device combinations.

 

 

 

Continue to expand and strengthen our direct sales force.    We believe that our specialized sales force is key to educating our customers about the clinical need for our molecular tests and our end-to-end workflow solutions. We are continuously optimizing market coverage of our highly qualified sales force and identifying new growth opportunities using a customized and targeted account profiling and messaging approach that better reflects our value proposition.

 

Enhance our customer support services.    Our goal is to be a trusted and valued partner to our customers by delivering market-leading test performance and service to further integrate genetic testing into their workflow. We intend to expand upon our Progenity Partnerships program, our proprietary customer support services platform, to further streamline patient identification and selection for testing and enhance our customized physician and patient management initiatives. In addition, we intend to expand upon our patient management tools, which streamline and enhance the patient experience, including patient education, payor pre-authorization, easy-to-read test results, and access to genetic counselors.

 

Develop and commercialize a disruptive precision medicine platform of GI diagnostics and therapeutics.    Our precision medicine platform is focused on addressing an unmet medical need of patients with GI disorders or related diseases. Leveraging an autonomous localization technology, we are developing a noninvasive, ingestible capsule platform, with investigational devices and drug/device combinations designed for both diagnostic and therapeutic

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purposes. We believe our product candidates, if successfully developed and approved or cleared, could become the first precision medicine products to diagnose and treat at the site of the disease within the GI tract. Ultimately, we intend to pursue commercialization of such product candidates ourselves or via strategic partnership.

Our Molecular Tests

Our molecular tests provide accurate, reliable, and fast test results while simplifying ordering, pre-test education, processing, testing, reporting, counseling, and billing for physicians and patients. We currently offer tests with clinical utility that enable physicians to deliver clinical decision support for, and address the medical needs of, patients and their families. We complement these tests with our proprietary suite of end-to-end workflow solutions, enabling us to educate physicians, patients, and payors on the benefits and clinical utility of genetic testing. In addition, we offer physicians the convenience of ordering multiple tests from one source, integrate our services seamlessly into their practices, and deliver easy-to-understand results and genetic counseling support.

Our Current Test Portfolio

Innatal Prenatal Aneuploidy Screen

Our Innatal Prenatal Screen, launched in 2015, is a noninvasive prenatal screening test offered to women early in pregnancy to screen for chromosome abnormalities, known as aneuploidy, such as Down syndrome, trisomy 18, and trisomy 13, and sex chromosome disorders through the analysis of cell-free DNA, or cfDNA. The test is performed using whole-genome sequencing technology and provides a high level of accuracy at or after 10 weeks of gestation.

Our Innatal Prenatal Screen provides a positive predictive value customized to the patient’s maternal age and the fetus’ gestational age in order to accurately quantify the probability that a patient with a positive screening result truly has an affected fetus. Performance of the assay is highly accurate and reliable in the commercial laboratory. As shown in Table 1 below, we recently performed a complete validation study using maternal samples with known fetal outcomes to evaluate the performance of the assay.

 

 

Table 1: Innatal Prenatal Screen Performance(1)

 

 

 

 

Disorder

 

Sensitivity

 

Specificity

 

Down Syndrome

99.2%

>99.9%

Trisomy 18

>99.9%

99.7%

Trisomy 13

>99.9%

>99.9%

Monosomy X

>99.9%

99.8%

XX

99.0%

99.9%

XY

99.9%

99.0%

XXX, XXY, XYY

Limited data for these less common aneuploidies preclude performance calculations

 

(1) 

Progenity Inc. validation data on file. Clinical correlation is indicated. If definitive diagnosis is desired, chorionic villus sampling or amniocentesis is necessary.

We believe this observed level of high performance sets our Innatal Prenatal Screen apart from competing NIPT. We believe our distinguished performance is a result of our in-depth knowledge and expertise with cfDNA, allowing us to deliver a high-performing and market-leading NIPT. By selectively designing a single capture system assay that is able to query thousands of unique but related sites across the genome, we are able to reduce assay noise and boost performance. Our capture system is able to retain the ability to scan widely across the genome to retain specificity while enhancing information in key features to ensure high sensitivity, even with samples with low levels of fetal DNA.

In our validation study, our test has shown a low (approximately 1%) failure rate. Independent studies of competitive technologies have shown failure rates as much as four times higher. Failures require the drawing of another blood sample from the mother or more invasive molecular testing options. The reliability of NIPT may result in lower rates of invasive molecular testing options such as chorionic villus sampling and amniocentesis, which can cause procedure-related pregnancy losses and impose additional costs.

Market Opportunity

Numerous medical society guidelines have recognized that all pregnant women, regardless of age, should be offered screening, such as NIPT, for aneuploidy to better identify patients for whom more invasive procedures, such as amniocentesis, are recommended. We believe that guidelines will continue to develop in support of broader prenatal screening, and that provider and payor education will drive increased adoption of NIPT. In August 2020, ACOG issued new practice guidance recommending NIPT screening for all pregnant patients, not only those at higher risk. We believe this substantially increases the likelihood for payors and state Medicaids to expand coverage to the average risk population. We believe this represents a significant market opportunity to expand use of NIPT, and Innatal, in the future. We estimate that the total addressable market for NIPT is approximately $1.5 billion annually in the United States. We estimate that approximately 2 million NIPT were performed in the United States in 2018, of which an estimated 35% were

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on high-risk patients (those with characteristics that increase their risk of an aneuploidy pregnancy, such as advanced age of >35 years, abnormal ultrasound, family history, or positive maternal serum screen result), and 65% were on average-risk (general population) patients. We also believe that efforts at expanding payor medical coverage policy to include all patients, regardless of a priori risk, would help further expand the covered market to include a larger portion of the approximately four million pregnancies that occur annually in the United States.

Preparent Carrier Test

Our Preparent Carrier Test, launched in 2015, screens for carrier status of hereditary diseases prior to or early in pregnancy. Carrier screening identifies couples at-risk of having a baby with a genetic disease and allows for informed medical management decisions. Our test offers a broad menu of genetic carrier screening tests with high detection rates for a variety of genetic diseases, including cystic fibrosis, spinal muscular atrophy, and fragile X syndrome. We designed the Preparent Carrier Test to assess a couple’s risk of passing down any of 200+ serious heritable diseases. This test is designed to meet the guidelines of the American College of Obstetricians and Gynecologists, or ACOG, and the American College of Medical Genetics, or ACMG, using a combination of methods (DNA sequencing, HEXA enzyme analysis, and hemoglobin evaluation) to maximize sensitivity.

In 2017, we expanded the Preparent product portfolio with the launch of the Preparent Exon test in partnership with Baylor Genetics. The Preparent Exon test uses exon sequencing to provide the higher sensitivity desired for reproductive medicine applications. Exon sequencing evaluates all of the coding regions of each gene and can identify both known and novel changes within the genetic code. The Preparent Exon test combines full exon sequencing and select copy number variant, or CNV, analysis. CNV analysis identifies large extra or missing pieces of select genes in which this type of variation, otherwise missed by exon sequencing alone, is a common cause of disease. This test design includes analysis of up to 280+ genes for a more complete evaluation of carrier status, resulting in, on average, 95% clinical sensitivity in the general population. Our product portfolio includes four pre-curated panels of 3, 25, 150+, and 280+ genes, designed to fit the needs of different customer segments.

Market Opportunity

ACOG recently changed its recommendations to add expanded carrier screening, or ECS, which would potentially include most of our Preparent Carrier Test panels, as an acceptable screening strategy. We estimate that the total U.S. addressable market for ECS is approximately $1.0 billion annually. We estimate that approximately 500,000 expanded carrier screens were performed in the United States in 2018. We believe significant opportunity exists to perform carrier screening in a greater proportion of the approximately four million pregnancies that occur annually in the United States, and to increase the penetration of ECS. We also believe that educating physicians and patients on the benefits of ECS, along with pursuing favorable medical policy coverage by payors, has the potential to convert traditional screening and non-screening patients to utilization of ECS.

Riscover Hereditary Cancer Test

Our Riscover Hereditary Cancer Test, launched in 2017 in partnership with Prevention Genetics, is a hereditary cancer screen that analyzes 31 genes associated with inherited risk of 12 types of cancer, including the BRCA1/2 genes for hereditary breast, ovarian, colorectal, endometrial, pancreatic, and other cancer syndromes, and the five genes associated with Lynch syndrome. Our panel was created to include the genes supported by guidelines from the National Comprehensive Cancer Network, or NCCN, and our sample workflow helps identify patients, typically those with a personal or family history of cancer, that are appropriate for testing, by following these guidelines. Our variant reporting process meets the standards of the ACMG and includes confirmation of all pathogenic variants, likely pathogenic variants, and variants of uncertain significance by a second, confirmatory method.

Patients receiving a positive Riscover test result can then consult with their physician to consider intensive screening options, lifestyle changes, drug regimens, or surgical interventions to reduce their lifetime risk of developing one of these heritable cancers. In addition, the test can also be used by asymptomatic individuals to assess familial cancer risk.

Market Opportunity

At present, we estimate there are over 82 million adults in the United States who are eligible for hereditary cancer screening in accordance with medical guidelines but that fewer than 5% of those adults have been screened. In addition, studies indicate that approximately 24% of women in OB/GYN practices meet NCCN guidelines for hereditary cancer screening, but that less than 15% of such eligible women are tested annually. We believe low penetration of this important market can be attributed to the challenges facing physicians in identifying eligible patients. For example, in a study of genetic testing for hereditary cancer published in the Journal of Clinical Oncology in 2017, the author estimated that more than 90% of unaffected, or asymptomatic, breast cancer susceptibility gene mutation carriers have yet to be identified.

 

 

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Resura Prenatal Test for Monogenic Disease

Our Resura Prenatal Test for Monogenic Disease, launched in 2019, is the first commercially available, custom-designed noninvasive prenatal test for families at risk for rare single gene disorders. The Resura test is available to families with known risk for monogenic disease, which is caused by a mutation within a single gene. Common examples of monogenic disease include cystic fibrosis, sickle cell anemia, spinal muscular atrophy, or SMA, and Tay-Sachs disease. For many of these diseases, knowing the diagnosis before birth informs critical treatment decisions upon the infant’s arrival. The Resura test can be performed on disease-causing variants of all inheritance types, including recessive, dominant, and X-linked genetic mutations. Currently, testing for these genetic variants in a fetus involves undergoing invasive prenatal testing, such as amniocentesis, or waiting for postnatal diagnosis. The Resura test uses fetal cfDNA extracted from a sample of the mother’s blood to test for genetic variants. The Resura test allows a patient to know with >99% accuracy whether their baby is affected, without the risks of invasive testing or waiting until after delivery. This knowledge relieves the patient of the unknown and empowers them with the information needed to prepare for their baby’s birth.

Additional Products: Products of Conception, Serum Screening, and Preimplantation Testing

Our test portfolio also includes chromosomal microarray for pregnancy loss, which evaluates the genetic cause of miscarriage, maternal serum screening for chromosomal disorders, and preimplantation genetic testing for use with artificial reproductive technologies.

Services Supporting our Molecular Tests

Genetic Counseling Services

Genetic test results require interpretation and collaboration to provide the best care for the patient. Our licensed, board-certified genetic counselors are available and accessible to discuss patient test results and consult with clinicians. This service provides the clinician with support to confidently order medically appropriate testing and comprehensively counsel patients both before and after testing. We believe access to our team of board-certified genetic counselors contributes to responsible, evidence-based testing by clinicians.

Electronic Medical Record Integration

Adoption of EMRs by healthcare practices was catalyzed by HITECH, and many of our clients have EMRs in place for management of their clinical workflows. Our connectivity services are designed to integrate with multiple EMR interfaces, providing either unidirectional results delivery or bidirectional ordering and results delivery. These capabilities support the implementation of consistent clinical protocols by making orders easy and complete, and by providing results in a centralized record.

Progenity Partnerships Program

Our Progenity Partnerships program was launched in 2018 as a package of workflow solutions that are flexible and customizable for individual physician practices. The program outlines the menu of options available to support the journey of both patients and physicians with our tests and allows practices to select the options that best support their clinical workflow and patients. The program also supports regular business reviews through clinical and billing scorecards, driving client-specific discussions about test performance, billing outcomes, and emerging business needs, and is designed to ensure that our products are fully meeting the needs of each customer. We believe this support package facilitates client loyalty and cross-portfolio selling.

Our Research and Development Activities

Our molecular test portfolio and pipeline and our precision medicine product pipeline are each powered by a combination of symbiotic technology platforms exploiting advances in genetics, epigenetics, and proteomics, fortified by an innovative bioinformatics infrastructure. Our ecosystem is designed to enable rapid development and validation of products in an integrated fashion.

Molecular Tests

We have developed proprietary, low-cost, high-throughput platforms for our Innatal, Preparent, and Riscover molecular testing products. Our platforms exploit proprietary developments in a number of key molecular biology applications, bioinformatic algorithms, and innovative clinical reporting. Our assay platforms are designed to deliver increased performance at lower costs compared to alternative methods and have a flexible architecture, designed to allow for rapid product development iteration cycles with best in class performance.

We have developed Preparent 3rd Generation based on our internally developed hybridization capture platform, which enables efficient and uniform sequencing of genomic regions ranging from a few hundred genes to the whole human exome by selecting, integrating, and optimizing the latest advances in library preparation, probe synthesis, and laboratory automation. The resulting data is interrogated for constitutional small nucleotide variants (1-100 bp) as well as larger copy number and structural variants. We have developed, verified, and validated the platform to support current carrier testing at a subsidiary laboratory and the platform is

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optimized, scaled, verified and validated at our Ann Arbor CLIA lab with commercial launch contingent on laboratory software systems build and integration.

Our molecular tests and tests in development include:

 

Next Generation Innatal Prenatal Screen (Innatal 4th Generation)

We are developing a proprietary single molecule DNA counting assay platform utilizing advanced optics with custom chemistry and molecular biology that we believe will represent a substantial improvement to our existing Innatal platform as a first product application, with simplified and more cost-effective assay workflow resulting in the same high clinical quality and reliability but with a reduction in turnaround time and a substantial reduction in cost of goods sold for our NIPT. We have completed the feasibility assessment for this test and are in the process of completing the optimization process. We recently demonstrated this assay’s potential to quantify fetal fraction and finalized the probe pool design. If successfully developed, we currently anticipate completing the validation of this product by the end of 2021. However, we cannot predict whether the COVID-19 pandemic or other factors will impact the timing of our validation study. For example, see “Risk Factors—The recent and ongoing COVID-19 pandemic could materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our business could be adversely affected by the effects of other future health epidemics or pandemics in regions where we or third parties on which we rely have significant business operations.”

 

 

Preeclampsia Rule-Out Test, Preecludia™

Preeclampsia is a hypertensive condition of pregnancy involving multiple pathways that usually occurs in the second half of pregnancy. The current standard of care for preeclampsia evaluations are often inconclusive and inaccurate. The only consensus treatment for preeclampsia is delivery of the baby, regardless of gestational age, which results in unnecessary hospital admissions, preterm births, and additional healthcare costs. Suspected preeclampsia before 37 weeks of gestation often results in preterm birth complications, thus a rule-out test with high negative predictive value for preeclampsia could provide the extra days and weeks of gestational development which are critical for positive infant health outcomes. While positive predictive testing is believed by some companies to be beneficial, the 2019 ACOG bulletin on gestational hypertension and preeclampsia stated that due to the relatively low positive predictive values (8% to 33%) of diagnostic tools, those tools cannot predict preeclampsia and should remain investigational. Our preeclampsia rule-out test is not diagnostic, as it is designed to assist physicians in ruling out (exclude) the disorder and relies on a high negative predictive value, or NPV, to provide physicians and other care givers with a novel adjunctive laboratory assessment to manage patients suspected of having preeclampsia. Preeclampsia is often indistinguishable from chronic and gestational hypertension, which are treated and managed differently; and therefore must be differentiated from true preeclampsia to avoid unnecessary negative outcomes, including preterm births.

To address this problem, we are developing a proprietary proteomics platform to support novel clinical tests focused on the quantitative measurement of multiple proteins. This multi-analyte platform is designed to detect complications and diseases manifesting from multiple complex biological pathways to provide insight into disease progression and to assist in clinical management. The platform is built on automated instrumentation, which is a Class I, 510(k) exempt device commonly found in clinical laboratories, which we believe will enable expansion of the platform into multiple clinical sites. We have developed reagents,

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including high affinity and specific antibodies, which we believe will deliver a differentiating platform focused on performance, sensitivity, and specificity.

Through this proteomics platform, we are developing Preecludia, a noninvasive, high sensitivity, multi-analyte blood-based test designed to assist in the clinical assessment and medical care decision-making process of physicians who care for pregnant women presenting with signs and symptoms of preeclampsia between 28 to 37 weeks of gestational age. We believe a risk assessment test that exhibits high NPV could provide a significant improvement in the ability to manage preeclampsia by ruling out the active condition, thereby obviating the cost and risk of further diagnosis and treatment in high-cost settings. If we are able to successfully develop and integrate this platform with our proven expertise in genomics and epigenetics, we believe we will be able to provide a multi-faceted assessment of a patient’s well-being.

The Preecludia test is being developed to serve as a potential triage and rule-out test to help providers differentiate between patients with symptoms who are at risk for preeclampsia. This proprietary test is a multi-analyte protein biomarker assay which is designed to be run from a simple blood draw. In the prospective, blinded PRO-129 clinical verification study, samples were collected and analyzed from over 400 pregnant women with substantial diversity, gathered from 24 U.S. clinical sites comprised of predominantly OB/GYN and Maternal Fetal Medicine practices. Subjects presented with possible signs and symptoms of preeclampsia, including new onset hypertension, but no clear diagnosis. Subject data were independently adjudicated by a third party, and subjects, for whom preeclampsia was not diagnosed at the time of enrollment, were followed longitudinally through delivery. In subjects sampled up to 37 weeks’ gestational age, the Preecludia test showed an 88.0% sensitivity, 73.3% specificity, and NPV of 98.2% at a 10% prevalence to rule out a patient’s risk of developing preeclampsia within the next 14 days from the date of specimen collection. These data were generally consistent with previous results observed in the test’s feasibility and optimization studies.

The final planned step in the development program is completion of the clinical validation study. We have already collected over 3,000 samples from more than 1,700 patients across 21 U.S. clinical sites enrolled in the PRO-104 validation study, and initiated this study in the first quarter of 2021. The study is expected to conclude in mid-2021.

If successfully developed, we anticipate a targeted commercial launch of this product in the second half of 2021. However, we cannot predict whether the COVID-19 pandemic or other factors will impact the timing of our commercial launch. For example, see “Risk Factors—The recent and ongoing COVID-19 pandemic could materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our business could be adversely affected by the effects of other future health epidemics or pandemics in regions where we or third parties on which we rely have significant business operations.” We may also explore various alternatives for future iterations of the test, including different target gestational ages.

We believe Preecludia, if successfully developed, will have the potential to impact the cadence and amount of patient visits and timing of indicated delivery, potentially saving the healthcare system money while also improving patient care for both mother and baby. We have discovered a novel biomarker for our preeclampsia test that we believe improves performance over prior tests. By designing the test to have high sensitivity and NPV rates, we expect the test, if and when offered, to be well suited to complement existing tools already part of the current standard of care, giving clinicians an additional strong, objective tool with which to better manage hypertensive disorders during pregnancy.

Market Opportunity

According to the Preeclampsia Foundation, preeclampsia occurs in 5% to 8% of pregnancies in the United States and is one of the leading causes of premature birth and maternal and neonatal morbidity and mortality. Based on our estimates, annually, over 700,000 pregnant women in the United States experience signs and symptoms that could be attributed to preeclampsia. In addition, due to poor screening tools, we estimate that the number of pregnant women monitored for preeclampsia is four times greater than the number affected. An estimated 18% of maternal deaths in the United States are directly associated with preeclampsia or eclampsia. The rate of preeclampsia in the United States has increased by about 25% in the last two decades, consistent with increases in preeclampsia risk factors such as obesity, maternal age, and diabetes in the population. The only consensus treatment is early delivery of the infant, regardless of gestational age. We estimate that the incremental healthcare cost burden associated with managing preeclamptic pregnancies exceeds $9 billion. We believe the total addressable market of our preeclampsia test is approximately $3 billion per year in the United States alone.

Other Opportunities

In response to the COVID-19 pandemic, the Avero Diagnostics laboratory is providing molecular testing for diagnosing COVID-19. The test is run on the Hologic Panther platform using the transcription-mediated amplification version of Hologic’s SARS-CoV-2 assay, which received emergency use authorization from the FDA. In September 2020, Avero Diagnostics secured a
substantial increase in its COVID-19 PCR testing capacity and supply chain access through a new relationship with ThermoFisher. Avero Diagnostics began a gradual expansion of its commercial testing offering nationally in mid-November 2020. Future demand for COVID-19 testing is becoming increasing difficult to predict due to various factors, including but not limited to, the availability of

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vaccinations, the number of individuals who choose to be vaccinated, the effectiveness of the various vaccinations against variants, the rate of new cases, and evolving government directives, laws, regulations and rules related to COVID-19 testing. In the long term, we expect that the COVID-19 pandemic will eventually dissipate and, as a result, the significance of COVID-19 testing to our business and financial results will decrease.

We are also developing an epigenetics platform designed to assess the global, regional, and site-specific methylation information of the genome at low cost that is intended to be an alternative to onerous, costly whole-genome bisulfite sequencing and enable more rapid diagnostic product development. Our epigenetics platform is currently a research use only discovery platform designed for the discovery of novel epigenetic signatures and variations across the human epigenome. Epigenetic signatures and variations may characterize phenotype changes and may serve as disease biomarkers if they correlate with a known clinical condition. Such biomarkers may be further developed as LDTs according to CLIA guidelines or as in vitro diagnostic devices, or IVDs, according to FDA regulations for diagnosis, screening, and/or monitoring of disease. We estimate the total addressable epigenetics market to be in excess of $13 billion, with particular application to nonalcoholic steatohepatitis, or NASH.

Precision Medicine for GI-Related Disorders

We are developing innovative platforms that we believe will support the advancement of our precision medicine pipeline and address the significant unmet medical needs of patients with GI-related disorders. Our approach is founded on the development of innovative technologies that are designed to diagnose and treat at the site of the disease. Using this platform, we intend to develop diagnostic and therapeutic solutions for a broad range of disorders, but our initial focus is on SIBO and inflammatory disorders such as IBD. These disorders are difficult to treat due to the challenges in diagnosing these conditions and monitoring the treatment response without the repeated use of invasive procedures such as upper GI endoscopies, colonoscopies, and biopsies. From the therapeutic perspective, the most effective approved therapies for IBDs such as ulcerative colitis and Crohn’s disease, are currently potent immunomodulatory drugs such as Humira and Xeljanz. Unlike the efficacy seen with other immunological disorders such as rheumatoid arthritis and psoriasis, we believe the efficacy of these potent agents for IBD is suboptimal. This can partly be explained by the inadequate bioavailability of the drug in the GI tract when administered by traditional oral capsules or by injection or infusion, even at high doses and because of the inability to increase dosage due to dose-limiting systemic toxicity. We believe a significant opportunity exists for a device that can diagnose GI-related disorders without an endoscopy or colonoscopy and a device that can deliver drugs in a targeted manner directly to the site of disease.

To address these GI-related disorders, we are currently developing four therapeutic solutions for use with our precision medicine drug/device combinations: PGN-001, which is a GI-targeted adalimumab for use with the Oral Biotherapeutic Delivery System and DDS; PGN-300, which is a GI-targeted vedolizumab for use with DDS and potentially the Oral Biotherapeutic Delivery System; PGN-600, which is a GI-targeted tofacitinib for use with DDS; and PGN-OB2, which is a GLP-1 analog for use with the Oral Biotherapeutic Delivery System. We believe that both the Oral Biotherapeutic Delivery System and DDS will have the potential to be used in combination with other therapeutics in addition to those described above.

Our precision medicine product platform is based on our own multi-disciplinary research developed over the last five years and also in-licensed and acquired intellectual property from Medimetrics. Three of our four ingestible medical device product candidates utilize autonomous localization technology. This technology is designed to enable both diagnostic and therapeutic capsule types to autonomously determine their location within the GI tract. The autonomous localization technology is based on a proprietary LED light and photodetector sensor array that detects reflected light in the GI tract and uses a proprietary algorithm to determine anatomical locations of interest, for example, the pyloric and ileocecal transition. Of note, this technology differs from other GI tract localization technologies that rely on pH levels and other physiological factors which are not specific and are highly variable and also differs from delayed release drug delivery systems such as pH sensitive capsules and MMX technology. Our PIL Dx capsules are designed to work with a remote radio frequency, or RF, detector device that externally monitors all sensor measurements and can transmit results of GI tract testing. Our core technology is also designed to allow for precise sample collection of intestinal fluids at a predetermined location and analysis in the GI tract in both the PIL Dx capsule and the Recoverable Sampling System capsule (described below). Additionally, certain of the capsules we have under development have temperature sensors that are designed to measure the temperature of the surrounding environment and a microchip oscillator that is designed to keep time.

Recoverable Sampling System

We are developing the Recoverable Sampling System, or RSS, to analyze and characterize the GI tract. The RSS capsule is an investigational electromechanical capsule designed to autonomously collect and preserve intestinal fluids as it transits through the GI tract for ex-vivo analysis. The sample chamber of the RSS capsule contains an absorbent sponge impregnated with preservative agents for a range of analytes including proteins, metabolites, and microbes. Once the capsule has been expelled, the subject would collect and ship the capsule to Progenity or another designated laboratory for sample extraction and analysis.

We believe the potential for this capsule is significant. For example, we believe it could help companies developing locally-active GI drugs to assess signals of early efficacy by measuring pharmacodynamic and associated downstream biomarkers at the site of action.

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The improved precision may allow for smaller clinical trial patient sizes. We believe the technology could potentially also be used for discovery of new therapeutic targets and diagnostic biomarkers. For practicing clinicians, we believe the RSS capsule, if successfully developed and cleared or approved, could be an invaluable tool to assess, in a noninvasive fashion, disease activity for inflammatory disorders like IBD and hepato-biliary disorders. In addition, recent third-party research has determined that the microbiome, which is the collective network of microorganisms that live in our GI tract, is essential for human development, immunity, and nutrition, and has led to the need for tools which can characterize the small bowel microbiome. We believe that the RSS capsule could offer researchers a simple noninvasive and yet powerful tool to characterize many diseases that have been associated with the small bowel microbiome. This could lead to advances in the understanding of many diseases which, until now, have been impractical or impossible to understand. If achieved, we expect this to lead to a new generation of more targeted therapies and diagnostics for many disorders.

We expect to initiate the first clinical proof-of-concept trial evaluating this technology in the second quarter of 2021. In preparation for our clinical trials, we have initiated manufacturing activities for clinical supply of the RSS capsule. Assuming successful results, we would expect to seek CE marking for this device in Europe and that, if CE marking is obtained, initial applications for this device would be in internal programs, partnerships, research use and academic programs.

PIL Dx—Progenity Ingestible Laboratory Diagnostics

We are developing the PIL Dx diagnostic capsule to analyze samples from specific locations of the GI tract. Once ingested, the capsule is designed to communicate wirelessly with a wearable RF receiver to report on status and other operational data. Through our core proprietary autonomous localization technology, the capsule is designed to sample intestinal fluid at a predetermined location within the GI tract for real-time analysis. An on-board fluorometric assay system would then perform prespecified analyses, which could include measurement of inflammatory cytokines, drug levels, microbes, nucleic acids and other metabolites. The sensor measurements and other data would then be transmitted to a wearable RF receiver for collection and processing. The receiver would then be returned to the clinician for data download and review.

Our most advanced investigational PIL Dx capsule is the Smart Capsule Bacterial Detection System, or SCBDS. The SCBDS capsule includes an integrated assay which is designed to measure with high sensitivity the change of a metabolically active substrate that correlates with the amount of live bacteria in the small intestine. We believe this technology, if successfully developed and approved or cleared, has the potential to become the standard of care for diagnosing SIBO. Currently the SCBDS capsule has undergone a series of validation and verification tests of the various subsystems and evaluations of the localization algorithm. In these studies, the localization of the capsule was confirmed either by CT scan or scintigraphy. In addition, in an ongoing study, clinical samples acquired via aspiration and endoscopy are being evaluated with the SIBO assay on a standalone basis. Beyond SIBO, we believe the PIL Dx capsule, if it can be designed to measure other analytes, will have broad potential applications, such as for early tumor detection and disease characterization and subtyping, and disease activity monitoring for conditions such as IBD. We have begun testing small intestinal fluid samples collected during endoscopy with aspiration on a benchtop version of our bacterial concentration assay at three clinical sites. Samples are measured for bacterial concentration with culture and plate count. As shown in Table 3 below, the interim test results as of October 13, 2020 show a concordance between the bacterial concentration assay and the reference standard of culture and plate count for identifying 10^5 colony forming units, or CFU, per mL.

Table 3: Standalone Bacterial Concentration Assay Testing Results

 

 

 

Clinical Site

 

SIBO Assay vs
TBC* (10^5 CFU per mL**)

 

1

36/39(92%)

2

11/12(92%)

3

15/15(100%)

 

 

Total

62/66(94%)

 

 

 

*

Total bacterial count via culture and plate count.

**

+/-.5 log.> 10^5 CFU per mL is the generally agreed definition of SIBO and agreed to by the FDA in meetings with Progenity.

These results were presented at the 2020 American College of Gastroenterology Annual Scientific Meeting by a leading key opinion leader, Dr Satish Rao. The presentation was honored with the highest award by the college for the small bowel section.

In the first half of 2021, we expect to initiate our first full function preclinical study and in the second half of 2021, we expect to initiate the first clinical proof-of-concept trial evaluating this technology. In preparation for our clinical trials, we have initiated manufacturing activities and are improving our manufacturing yield for clinical supply of the PIL Dx capsule. Assuming successful results, we expect to initiate a pivotal clinical study to support CE mark certification for this device in Europe and submission of an application seeking de novo classification in the United States. We expect to commercialize the PIL Dx capsule, if approved, through

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a combination of our current OB/GYN sales force, a new gastroenterology sales force, and/or partnership opportunities in the primary care market.

Market Opportunity

SIBO is a clinical condition associated with abnormally high bacterial counts in the small intestine that are characterized by symptoms such as bloating, abdominal pain, and diarrhea. These symptoms can be very debilitating and are believed to be caused primarily by an over production of gas by the bacteria. A reduction in the bacteria through antibiotic therapy generally alleviates the symptoms, at least temporarily. SIBO is substantially under-diagnosed and limitations exist with currently available testing methods, and as a result, patients with SIBO are poorly served. According to studies in the American Journal of Gastroenterology and the Gastroenterology Journal, there are approximately 105 million patient visits in the United States annually with symptoms that may be suggestive of SIBO. The current standard of care to diagnose SIBO is a duodenal or jejunal aspirate obtained via an invasive upper GI endoscopy which is then transported to a microbiology laboratory for culture, with results generally available several days later. There is high variability in the technique for the aspiration and culture from laboratory to laboratory, leading to inconsistent results between laboratories. This current standard of care is not only costly and time consuming, but it also requires sedation and is highly invasive, thus making our capsule technology a potentially attractive alternative. In addition, there are various breath tests which rely on the detection of hydrogen or methane as a proxy for bacterial presence in the small intestine. These breath tests suffer from lack of sensitivity and specificity which limit their effectiveness.

 

In addition, there are several different conditions that have similar symptoms, further complicating its diagnosis. As a result, SIBO is under-diagnosed. We believe that our SCBDS capsule, if successfully developed and cleared or approved, may fulfill an unmet medical need by accurately identifying patients that have SIBO so that physicians can treat and monitor their patients more effectively. It is estimated that SIBO may be as prevalent as up to 6% of healthy populations, up to 50% of patients on chronic proton-pump inhibitor treatment, up to 67% of patients with celiac disease, up to 88% of patients with Crohn’s disease, and up to 44% of patients with diabetes. We estimate the total addressable market for the treatment of SIBO to be in excess of $36 billion.

Targeted Therapeutics

We are developing a pipeline of investigational drug/device combinations that are designed to treat disease at its site in the GI tract and achieve high concentration in the affected tissues with the potential to drive efficacy and minimize systemic exposure and toxicity.

Drug Delivery System

Our targeted therapeutics pipeline leverages our targeted drug delivery system, or DDS, capsule in an effort to deliver drugs to the site of disease in the GI tract and incorporate drug formulations designed to improve stability and uptake in the GI tract. The DDS capsule is designed to identify the ileal/ileocecal region of the GI tract using our autonomous localization technology and deliver medication to that region. The DDS capsule is an investigational, single-use ingestible device with an outer casing made of inert material and rounded for ease of swallowing. It is designed to passively deliver a precise dose of drugs that can act locally in the GI tract, thereby potentially limiting systemic absorption and the associated toxicity side effects. Candidate drugs and biologics for this form of delivery are approved drugs and biologics that predominately act in the intestinal tissues, but that we believe have limited efficacy because of systemic toxicities. Examples of such drugs include adalimumab and tofacitinib.

There is research, including research conducted by us, that suggests this may be a viable therapeutic approach. For anti-TNFs such as infliximab and adalimumab, clinical studies have shown that in patients with active IBD, the tissue TNF level far exceeded the amount of drug reaching the actively inflamed tissue, and we believe that current approaches to drug delivery are therefore inadequate to suppress the inflammatory response. Moreover, preclinical studies have shown that monoclonal antibodies, or mAbs, such as adalimumab and vedolizumab were found in inflamed colonic tissue when given directly into the lumen of the colon. We have conducted preclinical studies which indicate that these mAbs, given locally, were as efficacious as drugs given via a systemic route of administration. We believe delivering mAbs and other drugs locally at the site of inflammation will result in a higher concentration of drug in the intestinal tissues of patients with IBD, potentially leading to greater efficacy. We believe that local delivery at the site of disease will result in less systemic exposure and may require lower drug administration, potentially reducing the severe adverse event profiles seen with some of these therapeutics. We also believe that because this technology is designed to have lower systemic absorption, it may be ideal for use in combination therapy with the potential to boost efficacy without adversely affecting the active drug’s safety profile.

Our current internal pipeline includes PGN-001, an oral version of adalimumab (a drug with approximately $19 billion in annual sales and for which we have produced a GMP batch). As a result of our use of known molecules, we believe that rapid proof of concept and value inflexion with preclinical and phase 1 pharmacokinetic results is possible.

Our lead DDS programs are in preclinical proof-of-concept stage and we recently announced successful completion of an in vivo preclinical device function study and initiation of clinical device function study in February 2021. Assuming successful results, we

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expect to initiate Phase 1 clinical studies followed by Phase 2 studies and subsequent Phase 3 studies to support MAA filings in Europe and NDA or BLA submissions in the United States. We believe certain programs may be eligible for the 505(b)(2) pathway in the United States and/or the hybrid MAA pathway in Europe.

Our investigational drug/device combinations with the DDS capsule are initially pursuing the targeted topical delivery of certain IBD therapies. We estimate this market to be in excess of $15 billion.

Oral Biotherapeutic Delivery System

Over the past two decades, biologic drugs have become the standard of care for a variety of diseases including rheumatoid arthritis, psoriasis, diabetes, Crohn’s disease, ulcerative colitis, and a range of cancers. Generally, these biologics are administered systemically via subcutaneous or intravenous injection. We are developing drug/device combinations designed to deliver biologics systemically, via a more convenient oral route of administration. Our unique approach to oral delivery of biologic drugs is through use of an ingestible capsule designed to spray a liquid drug substance past the mucosal surface into the submucosal tissues of the small intestine where it can be absorbed systemically. This ingestible capsule technology is designed to protect the drug from acids and proteolytic enzymes of the gut until it reaches the site of delivery through means other than our autonomous localization technology where it may be triggered and spray the preloaded drug substance past the intestinal barrier. The device design is simple, low-cost, and has the appearance of a typical drug capsule. We initially developed an endoscopically or surgically placed, liquid jet device for optimization and early preclinical work and have since progressed to an autonomous fully integrated prototype device for further evaluation. With the endoscopically or surgically placed device we assessed the potential bioavailability rates that may be achieved with our device in preclinical swine studies with drugs such as human insulin, dulaglutide, and adalimumab. In these studies we have observed bioavailability of approximately 19% (n=18), 29% (n=11), and 27% (n=11), respectively. We believe this technology, if successfully developed, has broad applications beyond GI diseases and can be applied to numerous drugs that currently demand a parenteral route of administration.

In conjunction with our development of this device, we anticipate potential partnership opportunities, including with manufacturers of biologic drugs, in the parenteral protein market. We estimate this market to be in excess of $250 billion (or over $100 billion for monoclonal antibodies alone) with strong patient and physician preferences for the oral delivery of proteins as compared to subcutaneous injections.

Our current internal pipeline includes PGN-OB1, an oral version of adalimumab (a drug with approximately $19 billion in annual sales and for which we have produced a GMP batch), and PGN-OB2, an oral version of a GLP-1 analog (a drug with a projected $15 billion market by 2025). As a result of our use of known molecules, we believe that rapid proof of concept and value inflexion with preclinical and phase 1 pharmacokinetic results is possible.

Our lead oral biotherapeutic delivery system programs are in preclinical proof-of-concept stage and we expect to complete a preclinical study demonstrating the first fully autonomous device in the first quarter of 2021. Assuming successful results, we expect to initiate Phase 1 clinical studies followed by Phase 2 studies and subsequent Phase 3 studies to support MAA filings in Europe and NDA or BLA submissions in the United States. We believe certain programs may be eligible for the 505(b)(2) pathway in the United States and/or the hybrid MAA pathway in Europe.

Key Targeted Therapeutic Opportunities in Gastrointestinal Disease

Inflammatory Bowel Diseases

IBDs are a heterogeneous group of inflammatory disorders of the GI tract, and broadly include two major groups: Crohn’s disease and ulcerative colitis. According to the Crohn’s and Colitis Foundation, or CCF, there are approximately 1.6 million Americans affected by IBD. The disease typically has an onset before 30 years of age and is a lifelong illness that can be potentially life-threatening. The body’s immune system which normally protects the body from external insults like bacteria and viruses becomes dysregulated in patients with IBD and this causes the immune system to attack the body’s own tissues. Although IBD has no known cause, there is strong evidence that genetics, a dysregulated immune system, the environment and the gut microbiome all play a role initially in causing the disease, and then perpetuating the inflammation.

Ulcerative Colitis

Ulcerative colitis, or UC, is characterized by inflammation and ulceration of the mucosal lining of the colon. The typical symptoms include diarrhea, bleeding and often abdominal pain. In the more severe cases, there can be large amount of blood loss, which can be life-threatening and require emergency surgery. The goal of medical treatment for all forms of IBD is to reduce the inflammation and to induce remission initially with medication, followed by the administration of maintenance medication to prevent a relapse of the disease. Treatment for UC depends on the severity of the disease, complications, and response to previous treatment. Most patients with mild to moderate UC will first be treated with aminosalicylates. For patients with moderate to severe UC who do not respond to

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aminosalicylates, more potent systemic therapies such as infliximab and adalimumab are used. The CCF estimates that UC may affect as many as 907,000 Americans.

 

 

Crohn’s Disease

Similar to UC, Crohn’s disease, or CD, is a chronic disorder that causes inflammation of the digestive tract, but unlike UC, CD may involve all layers of the intestine and can affect any part of the intestines. The symptoms of CD range from mild to severe with the most common symptoms being diarrhea, abdominal pain, fever, and sometimes rectal bleeding. Mild symptoms may be treated with topical corticosteroids and aminosalicylates. For moderate to severe CD, the biologics described above are commonly used to treat UC. The CCF estimates as many as 780,000 Americans have CD, and states that it is most often diagnosed in adolescents and young adults between the ages of 20 and 30 years.

Other Diseases of Interest

While the abovementioned diseases are our initial focus, we believe our precision medicine platform may have broad application beyond SIBO and IBD and into other diseases where a dysbiosis of the small bowel microflora has been implicated, including irritable bowel syndrome, nonalcoholic fatty liver disease and NASH, cardiovascular diseases, and central nervous system disorders like Parkinson’s disease, depression, and autism. It is well accepted that the current technology of characterizing the stool microbiome is not optimal to understand the host-microbe interaction, especially for evaluating the bacteria in the small intestine. Current technologies to assess the small intestinal microbial flora are highly invasive, imprecise, and/or impractical for larger studies; therefore, we believe that a device that has the ability to collect and characterize the bacteria, and analyze their function would dramatically advance our knowledge and understanding of the complex host-microbe interaction. We believe that our product candidates, if successfully developed, may be able to achieve these outcomes.

Another area of precision medicine research and development interest for us is the early detection or recurrence of GI tumors such as liver cancer, pancreatic cancer, and colorectal cancer, an addressable market we estimate to be approximately $4.5 billion. We believe that DNA fragments from GI tumors will be detected in intestinal fluids at higher concentrations than in the blood and therefore our products may be more sensitive than screening through a blood sample or via commercially-available diagnostic tests that analyze stool samples.

Key Features of our Precision Medicine Platform

Our platform is distinguished by several key elements:

 

Robust discovery and development talent.    Our multi-disciplinary precision medicine team is comprised of over 25 full-time, experienced drug discoverers, researchers, and innovators working to create solutions to improve patient outcomes. In addition to our full-time staff, our team is augmented by more than 60 contract researchers, manufacturers, and consultants. We have also added key R&D employees as part of our acquisitions, including the former Chief Scientific Officer of Medimetrics.

 

Disciplined approach to target identification and prioritization.    We intend to target diseases with large markets and where current treatments have limited efficacy and very high morbidity, such as IBD. In addition to prioritizing diseases with high unmet need, we will look for the potential to expand the portion of the population that can be treated as our targeted therapeutics may have lower systemic toxicity, lower immunogenicity, and increase market penetration.

 

Opportunistic approach to drug candidate selection.    Using our precision medicine platform, we are developing potentially improved versions of existing drugs with established mechanisms of action. We intend to only pursue mature and approved drugs with expiring patents that we believe are biologically suited to address the target disease. We believe this strategy of starting with an approved therapeutic is core to operating our precision medicine drug development programs in a scalable and capital efficient manner.

 

 

 

Operational efficiency.    By starting with approved drugs with known mechanisms of action, we believe we can efficiently and cost-effectively evaluate opportunities that we believe are the most promising, and very quickly discontinue programs that do not meet performance thresholds. We believe this will enable us to develop a sustainable and scalable platform to develop multiple drug/device candidates.

 

Rational and optimized ownership for each program.    With each product candidate, we intend to strategically evaluate the most effective and efficient means for development. When we believe we are best suited to continue a program’s development, we intend to continue to fund it internally to commercialization. However, if we believe a partner is better suited to progress a specific program, we may consider entering into strategic partnerships for our programs when we believe such partnerships are economically attractive. We entered into a collaboration agreement

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with a third-party in August 2020 for one of our precision medicine products and we continue to pursue additional collaborations, although none of these relationships are material individually or in the aggregate.

Laboratories

Our corporate offices are located in San Diego, California. We own and operate a certified CLIA and CAP accredited laboratory located in Ann Arbor, Michigan specializing in the molecular testing market serving women’s health providers in the obstetric, gynecological, fertility, and maternal fetal medicine specialty areas in the United States. Distribution is managed by a dedicated sales force and a field operations team who support all logistical functions in receiving clinical samples to the laboratory for analysis. Through our affiliation with Mattison Pathology, LLP, a Texas limited liability partnership doing business as Avero Diagnostics, located in Lubbock and Irving, Texas, our operations have expanded to provide anatomic and molecular pathology tests in the United States.

We have a GI-focused laboratory in Irving, Texas to support our precision medicine platform. We believe that the technologies under development will provide quantitative analysis for the RSS capsule and the PIL Dx capsule, as well as for precision medicine-related studies. The team members located at the laboratory are developing and validating reagents and assays to analyze protein, nucleic acid, metabolite, and bacterial analytes. The assays will be used for a range of nonclinical and clinical studies in conditions including SIBO and IBD, and in oncology.

Avero Diagnostics

Through Avero Diagnostics, our operations have expanded to provide anatomic and molecular pathology tests in the United States. Our specialized pathology tests provide expertise in the area of women’s healthcare and full-service anatomic pathology. Our expertise in pathology covers a broad spectrum of subspecialties which include gynecologic pathology, breast pathology, urologic pathology, GI pathology, molecular pathology, and dermatopathology. We currently offer histopathology, cytopathology, molecular pathology, and fluorescence in-situ hybridization tests to a network of clients located throughout the United States through Avero Diagnostics. We currently also offer genetic tests for NIPT and carrier screening through Avero Diagnostics. See “Business—Government Regulation—Avero Diagnostics Relationship and the Corporate Practice of Medicine” for more information regarding our relationship with Avero Diagnostics.

Laboratory Operations and Processes

Our laboratory utilizes islands of automation and an integrated laboratory information system, or LIS, to deliver high quality results, while maximizing efficiency and agility. Samples are received by the laboratory directly from individual practices or collected by courier services via commercial shippers. Once received, sample and patient demographic information are entered into the LIS. Patient information is entered directly from physician practices (EMR orders), partner laboratories via interface to an EMR, manually from standard requisition forms, or via scanning (using an optical character recognition platform). Samples are linked to patient records via barcoded labels and distributed to testing departments or a partner laboratory.

Our islands of automation strategy utilize automated liquid handling systems to perform high complexity and repetitive tasks in a structured and reproducible manner multiplying the productivity of each staff member. Each task is verified by highly trained staff before being passed to the next step. This strategy is designed to allow optimization of staff and equipment through daily volume fluctuations while also permitting continuous process improvement and updating for new product offerings without requiring redevelopment of a fully automated process.

In-house testing first proceeds to the hematology department, if applicable, and samples are loaded onto the testing platforms. Loaded samples are automatically scanned as they are fed into the testing instruments. Preparent and Innatal samples are then delivered to the DNA extraction group. Samples are scanned while being loaded on the extraction systems, and the sample ID, plate, and plate location are captured in our LIS system, linking sample information to plate and location. Isolated DNA is split so that one isolation can be used for multiple different next generation sequencing, or NGS, and non-NGS tests, thereby reducing the need for multiple extractions and reducing labor and materials costs.

After extraction, samples are processed in batches utilizing color coded and barcoded pre-aliquoted reagent plates. Our internally prepared reagent plates reduce technologist time and improve throughput and turnaround time. Use of the color coding system and barcoding allows traceability of all reagents without requiring laborious and error prone manual recording. Continuing with automation islands, steps requiring transfer of samples as well a multi-step process are performed by internally developed automation systems. This includes amplification set-up and sample addition. Each sample plate, reagent plate, liquid handling system, thermocycler, sequencer/detection system, and performing technologist is recorded. After amplification, library preparation and indexing samples are pooled and quantitated to allow for optimal loading on the sequencing instruments. Due to the islands of automation strategy, multiple workflows coexist on common equipment maximizing utilization while ensuring the required

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turnaround time. In order to ensure maximum quality during the manual steps, the materials and set-up are verified by a second trained technologist.

Once patient data is processed through the laboratory, and sent through any applicable bioinformatics pipelines, it goes to the laboratory directors for analysis and resulting. Depending on the test, analysis is performed through either a proprietary, internally-built, web-based software platform, or a commercially available desktop-based software. Laboratory directors review run-level quality metrics and positive/negative/no-template control results to confirm that each patient test run meets pre-defined criteria for reporting. Results for each patient are then carefully reviewed and the laboratory director makes the decision to either report the results, rerun the patient sample, or report the test as failed analysis. These decisions are made based on standard operating procedures and laboratory director discretion.

When laboratory director-approved results are available for a given patient report, the report is automatically generated in Progenity Report Writer, a web-based software. Laboratory directors then review each patient report and approve or edit the report as needed. Most report content is pre-programmed and automatically added to each report. Only a subset of reports require manual edits before approval and release to the ordering provider. Progenity Report Writer is also the software that the laboratory directors use to approve and release all reports generated by third-party laboratories for tests not run in our laboratories.

Our board-certified laboratory directors also work closely with the laboratory’s medical science liaisons, or MSLs, who are also all board-certified genetic counselors. The MSLs are the outward facing clinical group, and they take calls from ordering providers and patients. If a clinician calls in with information that could be relevant to the analysis and reporting of their patient’s test, the MSLs pass this information on to the laboratory directors. Laboratory directors also work with the MSLs any time complex results are found that require additional information from the ordering provider. MSLs also assist laboratory directors with writing custom report language for complex cases to make sure it can be easily understood by the ordering provider.

Finally, laboratory directors are responsible for ensuring compliance with CLIA regulations, applicable state-specific regulations, and recommendations from professional societies such as CAP, ACMG, and Clinical and Laboratory Standards Institute. The laboratory directors fulfill this requirement by working with the operations department to confirm that all laboratory personnel have the proper credentials and training, procedural requirements are met, and the relevant quality metrics are monitored over time to identify any possible problems that could affect patient results.

Once complete, results are provided to clients through either an interface to an EMR, or by electronic facsimile. We staff an internal team of genetic counselors to provide additional resources to clinicians, and to speak to patients who need additional counseling. Our client service representatives serve as a final resource. These representatives support our sales team and clients in addressing challenges related to correctly populated requisitions or supplementary information necessary for clinical interpretation.

Laboratory Supplies

We are party to a supply and service agreement, as amended, or the Supply Agreement, with Illumina, pursuant to which Illumina provides us products and services that we use in our laboratory operations, including certain sequencing instruments and reagents, as well as services for the installation, maintenance, and repair of the sequencing instruments.

Pursuant to the Supply Agreement, we have agreed to exclusively use Illumina consumables and equipment for all NIPT laboratory tests that we perform during the term of the Supply Agreement, with the exception of certain reagents that are not available for purchase from Illumina. In addition, we have a minimum purchase requirement per calendar quarter for consumables. We also must maintain a service contract on each sequencing instrument that we use for our NIPT laboratory services.

During the term of the Supply Agreement, we are required to make a rolling, non-binding forecast of our expected needs for reagents and other consumables, and place purchase orders for reagents and other consumables. Illumina may not unreasonably reject conforming purchase orders. Subject to discounts that vary depending on the volume of hardware and reagents and other consumables ordered, the price for sequencing instruments and other services is based on Illumina list prices, and the price for reagents is based on contract prices that are fixed for a set period of time and may increase thereafter subject to limitations.

The initial term of the Supply Agreement continues until June 2022. We may terminate the Supply Agreement in our discretion at any time by giving 90 days’ prior written notice to Illumina.

Sales and Marketing

We have a commercial team of more than 150 individuals in the United States, including the sales force and marketing and health plan market access teams. Our sales force promotes our products across three regions with a focus exclusively on OB/GYNs and maternal-fetal medicine providers in the women’s health market and offers our full product portfolio in an effort to maximize cross-selling opportunities. We are expanding into adjacent specialty markets with sales and marketing teams targeting customers in genetic

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counseling and reproductive medicine, with further expansion into gastrointestinal medicine planned for 2023. We are also evaluating the expansion of our business internationally to leverage our portfolio, with our Preeclampsia test representing one potential avenue for expansion.

Engagement with our customers not only generates testing volume, but also opens access to key opinion leaders, potential clinical research partners, and decision-makers in large combined practice groups. We expect that strong relationships with key players in these markets, as we expand our women’s health portfolio, will allow us to carefully address the needs, motivations, and business goals of our customers.

Our marketing strategy is focused on driving adoption of genetic testing protocols and educating healthcare professionals on the value of genetic testing for healthcare management decisions. Our marketing activities include presenting clinical research at medical conferences and scientific meetings, conducting provider education campaigns and hosting medical education events through field medical science liaisons and sales representatives, using online advertising, social media, and public relations channels to raise product and company awareness, and developing strategic business partnerships.

Our health plans team works with the government and the commercial sector, with a focus on health systems, hospitals, and large physician groups.

Reimbursement

Laboratory tests are classified for reimbursement purposes under a coding system known as Current Procedure Terminology, or CPT, which we and our physician customers must use to bill payors and to receive payment for our molecular tests. These CPT codes are associated with the particular molecular test that we have provided to the patient. Once the AMA establishes a CPT code, CMS or its contractors may establish payment levels and coverage rules with respect to our molecular tests under Medicare and Medicaid. In addition, commercial third-party payors independently establish reimbursement rates and coverage rules for our molecular tests under their respective plans.

We currently submit for reimbursement using CPT codes that we believe are appropriate for our testing, but codes may be rejected or withdrawn and payors may seek refunds of amounts that they claim were inappropriately billed to a specified CPT code.

We generate revenue from the sales of our molecular tests and receive payments for such tests from four distinct channels: commercial third-party payors, government health benefits programs such as Medicare and Medicaid, laboratory distribution partners, and individual patients. Reimbursements from payors, including commercial third-party payors and government health benefits programs, constituted more than 95% of our revenue during the year ended December 31, 2020. We are currently contracted with payors representing approximately 146 million covered lives.

We seek to improve reimbursement for our tests through active engagement with payors and patients, with a goal to maximize revenues while ensuring compliance with applicable rules and regulations.

Commercial Third-Party Payors

We submit claims for reimbursement and receive associated payments from commercial third-party payors. Our contracts with commercial third-party payors provide for contracted rates of reimbursement. For instances where we are not contracted with a particular commercial third-party payor, we submit claims seeking reimbursement on a non-contracted basis.

If we become an in-network provider in a commercial third-party payor health plan, we become subject to the terms of contracts entered into with such payors and we may be subject to discipline, breach of contract actions, non-renewal, or other contractual remedies for noncompliance with the requirements of these contracts (which may include reduced reimbursement rates) and we are also subject to associated state or federal laws.

We have entered into settlement agreements with commercial third-party payors in order to settle claims related to past billing and coding practices that have been discontinued, including, without limitation: Connecticut General Life Insurance Company and Cigna Health and Life Insurance Company, or Cigna, United HealthCare Services, Inc. and UnitedHealthcare Insurance Company, or United, and Aetna Health Management, Inc., or Aetna. In December 2018, we and Avero Diagnostics entered into settlement agreements with Cigna pursuant to which Avero Diagnostics agreed to pay Cigna $12.0 million in a series of installments and we agreed to guarantee $6.0 million of such payment. We and Avero Diagnostics also agreed to certain covenants regarding our billing practices. As of December 31, 2020, all obligations under such agreement with Cigna were fully settled. In September 2019, we entered into a settlement agreement with United that governs past benefit claims and a corrective action plan which governs future benefit claims that we submit for reimbursement at an arm’s length, out-of-network basis to United. The total settlement amount was $30.0 million, to be paid in a series of installments. We have paid $18.0 million under such agreement to date. In November 2019, we entered into a settlement agreement with Aetna, which was amended in April 2020, pursuant to which we agreed to pay Aetna

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$15.0 million in a series of installments. We have paid $12.5 million under such agreement to date. As part of the Aetna settlement, we also entered into an in-network participation agreement with Aetna that became effective January 1, 2020. Each of these settlement agreements provides for a release of past claims by all parties.

Payor Dispute

On November 16, 2020, we received a letter from Anthem, Inc., or Anthem, informing us that Anthem is seeking recoupment for historical payments made by Anthem in an aggregate amount of approximately $27.4 million. The historical payments for which Anthem is seeking recoupment are claimed to relate primarily to discontinued legacy billing practices for our NIPT and microdeletion tests and secondarily to the implementation of the new CPT code for reimbursement for our Preparent expanded carrier screening tests.

As noted above, we have historically negotiated and settled similar claims with third-party payors. Although our practice in resolving disputes with other similar large commercial payors has generally led to agreed settlement amounts substantially less than the originally claimed amount, there can be no assurance that we will be successful in a similar settlement amount in any ongoing or future dispute. In our experience with negotiations with similarly situated commercial payors, a settlement may take six to twelve months to negotiate, and the time period over which a negotiated settlement payment may be paid could extend from one to two years, or longer. Historical settlement amounts and payment time periods may not be indicative of the final settlement terms with Anthem, if any. We intend to negotiate and/or dispute this claim of recoupment with Anthem and seek to offset any amounts owed by Anthem to us. Anthem has indicated a willingness to engage in contract negotiations for in-network status separately and in parallel to discussions regarding its recoupment claim. The resolution of this dispute may or may not include our moving in network with Anthem. As a potential means of making recoupment payments, if any, we may negotiate to apply temporarily lowered contracted rates for a specific period. Such provider-payor disputes are not uncommon and we expect to approach this dispute with an aim to resolve in a mutually satisfactory manner. It is not possible to predict the ultimate outcome of this matter and the timing for resolution (see Note 10).

Government Health Benefits Programs

We are enrolled and eligible to receive payment from government health benefits programs, including Medicare and Medicaid. We are a participating provider under most state Medicaid plans.

In April 2014, Congress passed the Protecting Access to Medical Care Act of 2014, or PAMA, which included substantial changes to the way in which clinical laboratory services are paid under Medicare. Under PAMA, laboratories such as us that receive the majority of their Medicare revenue from payments made under the Clinical Laboratory Fee Schedule or the Physician Fee Schedule are required to report to CMS, beginning in 2017 and every three years thereafter (or annually for “advanced diagnostic laboratory tests”), commercial third-party payor reimbursement rates and the volume of tests that they have performed for such payors. Laboratories that fail to report the required information may be subject to substantial civil monetary penalties. If we determine that our tests meet the current definition of advanced diagnostic laboratory tests, we will be required to comply with these reporting requirements on an annual basis.

For clinical diagnostic laboratory tests furnished on or after January 1, 2017, Medicare reimbursement is paid based upon the weighted median of the reported commercial third-party payor payments for the same test, as calculated using the data collected by applicable laboratories and reported to CMS during the specified data collection and reporting period. For clinical diagnostic laboratory tests that are assigned a new or substantially revised code, initial payment rates are assigned by the cross-walk or gap-fill methodology that existed under the prior law. The cross-walk methodology applies 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. The gap-fill methodology applies when no comparable, existing test is available. In this case, the Medicare Administrative Contractor, or MAC, develops a local payment amount for the new test code and CMS calculates a national limitation amount after a year of payment at the local MAC rates based on the median of rates for the test code across all MACs. Initial payment rates for new advanced diagnostic laboratory tests are based on the actual list charge for the laboratory test.

The revised reimbursement methodology described above generally results in relatively lower reimbursement amounts under Medicare for clinical laboratory services than has been historically reimbursed. Any reductions to reimbursement rates resulting from the new methodology are limited to 10% per test per year in each of 2018 through 2020 and to 15% per test per year in each of 2021 through 2023. The CARES Act amended the timeline for reporting private payer payment rates and delayed by one year the payment reductions scheduled for 2021.

In addition to the CARES Act, Congress has enacted other laws in response to the COVID-19 pandemic to provide financial relief to healthcare providers and suppliers, including diagnostic laboratories, and encourage implementation of diagnostic testing and treatment for COVID-19. For instance, the Families First Coronavirus Response Act, enacted on March 18, 2020, requires certain governmental and commercial insurance plans to provide coverage of COVID-19 diagnostic testing services without imposing cost-

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sharing (e.g., copays, deductibles, or coinsurance) or other utilization management requirements. The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act, enacted on April 24, 2020, each appropriated approximately $100 billion to provide financial relief for certain healthcare providers and to expand treatment and diagnostic testing capacity for COVID-19. The CARES Act and subsequent legislation also suspended, for the period from May 1, 2020 to March 31, 2021, the 2% Medicare payment reduction created under the sequestration required by the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012), and extended the sequester by one year, through 2030.

Laboratory Distribution Partners

We have contracted with other clinical and genetic laboratories for distribution of our products. Our reimbursement for these products comes directly from the contracted laboratory. In some instances, our distribution partners will request that we bill the payor for the provided test on their behalf. In these instances, we collect payment directly from the payor.

Individual Patients

We generally seek to collect co-payments and deductibles directly from patients in cases where we have billed the payor. For these patients, we offer a range of flexible payment plans to assist in the payment of co-payments and deductibles. We also seek to collect payment directly from patients for cash paying patients who do not have or have elected not to use medical insurance. Patients paying out of pocket are generally offered a discounted price. We are not currently promoting or offering direct-to-consumer testing products.

We are subject to applicable state and federal laws regarding who should be billed, how they should be billed, how business should be conducted, and how patient obligations regarding cost sharing should be handled.

Competition in Molecular Testing

Women’s Health Molecular Testing

We compete with numerous companies that have developed and commercialized some combination of our core product portfolio: NIPT; carrier screening; and hereditary cancer screening. Our primary competitors include Invitae, Myriad Genetics (which acquired Counsyl in 2018), and Natera. Secondary competitors include Ambry Genetics, GeneDx (a subsidiary of Bio-Reference Laboratories), LabCorp, Quest Diagnostics, Roche Diagnostics, Sema4, and other commercial and academic laboratories. We expect additional competition as other established and emerging companies enter the women’s health molecular testing market, including through business combinations.

We believe the principal competitive factors in our market include the following:

 

test performance, including sensitivity, specificity, failure rates, and turnaround time, as demonstrated in clinical validation;

 

value of product offerings, including pricing and impact on healthcare spending;

 

coverage and reimbursement arrangements with third-party payors;

 

convenience of testing;

 

additional value-added services and digital healthcare tools;

 

effectiveness of sales and marketing efforts;

 

development and introduction of new, innovative products;

 

key opinion leader support;

 

brand awareness; and

 

ease of integration with healthcare provider practices.

We believe that we compete favorably on the basis of the factors above, particularly in test performance, additional value-added services, and digital healthcare tools, value of product offerings, and effectiveness of sales and marketing efforts.

Preeclampsia

The U.S. market for preeclampsia tests currently includes certain positive or predictive tests such as the predictive Preeclampsia Screen T1 offered by NTD Labs (purchased from Perkin Elmer in 2016) and the GestAssured preeclampsia test using congo red staining offered by GestVision. We expect to offer a noninvasive biomarker test designed to rule out preeclampsia. We anticipate that our test would compete favorably by providing superior sensitivity, specificity, and high NPV to rule out preeclampsia in symptomatic women as compared to existing clinical assessment tools, including those discussed above.

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Testing Services

The market for anatomic pathology and molecular testing is highly competitive. We compete with a vast network of local and regional pathology groups, national laboratories, hospital-based laboratories, and physician-owned laboratories. Competition in the industry is based on several factors including price, quality of service, accuracy of results, clinical expertise, test menu, turnaround time of test results, commercial strategy and execution, ability to retain high-quality staff, client relationships, and reputation.

Competition in Precision Medicine

The biotechnology and pharmaceutical industries are characterized by rapid technological advancement, intense competition, and a strong emphasis on intellectual property and proprietary products.

While we believe that our proprietary technology platform, knowledge, experience, and scientific expertise provide us with competitive advantages, we face substantial competition from major pharmaceutical companies, biotechnology companies, academic institutions, government agencies, and public and private research institutions. For any products that we eventually commercialize, we will not only compete with existing technologies and therapies but also with those that may become available in the future.

Given our technology’s potential utility across multiple applications, we expect to face intense competition from a diverse set of competitors. Many of our competitors, either alone or with strategic partners, have significantly greater financial, technical and human resources than we do. Competitors may also possess more experience developing, obtaining regulatory approval for, and marketing novel treatments and technologies in the areas we are pursuing. These factors could give our competitors an advantage in recruiting and retaining qualified personnel, completing clinical development, securing strategic partnerships, and commercializing their products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability profile, reliability, method of administration, convenience of dosing, price, and reimbursement.

 

Recoverable Sampling System

To our knowledge, there are no commercially available ingestible sampling devices representing an immediate competitive threat to our technology. This is, however, a nascent space, and we expect to see future competition from new entrants as companies develop potentially competitive technologies.

PIL Dx—Progenity Ingestible Laboratory Diagnostics

Although we believe that they are comparatively limited in functionality and capability, we face competition from a small number of currently marketed or in-development diagnostic devices and tests specifically targeting GI disorders, such as those from Medtronic and Commonwealth Diagnostics International. Additionally, we will similarly face competition from new entrants as advances in diagnostics and engineering bring new technologies to market.

Drug Delivery System

The current IBD market is both established and mature, comprised of a range of therapeutic agents including branded and generic small molecules, biologics, biosimilars, and involving multiple mechanisms of action as well as routes of administration. Although we believe our technology platform will provide us with a competitive advantage in its ability to enable targeted delivery of therapeutic agents (and, in particular, biologics) via oral administration, we will face competition from several companies whose current R&D efforts will likely result in the emergence of newer pharmaceuticals touting oral administration, more convenient dosing frequency, novel mechanisms of action, and improved safety profiles and drug availability. We believe that the majority of competition will come from those companies marketing or developing biologics and small molecule therapeutics, such as AbbVie, Eli Lilly, Galapagos, Gilead, J&J, Pfizer, Roche, Takeda, and UCB.

Oral Biotherapeutic Delivery System

We expect to face competition from a number of technologies currently marketed or being developed to enhance or facilitate the oral administration of therapeutic agents. There is a wide range of competitive technologies and mechanisms that may challenge us.

The primary categories of oral biotherapeutic technologies currently available or being developed by our competitors include:

 

Functional excipients designed to enhance the solubility and/or permeability of peptides and small molecules: Enteris Biopharma and Novo Nordisk;

 

Enteric coating technologies designed to prevent gastric degradation of active pharmaceutical ingredients and facilitate GI delivery: Assembly Biosciences, Catalent, Cosmo Pharmaceuticals, Intract Pharma, Lonza, and Tillotts Pharma; and

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Ingestible devices designed for the targeted delivery of a therapeutic payload: Lyndra Therapeutics and Rani Therapeutics.

Intellectual Property

The proprietary nature of, and intellectual property protection for, our existing and future products, processes, and know-how are important to our business. Our success depends in part on our ability to obtain patent and other legal protection for our products, technology, and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from infringing on our proprietary rights. We rely on a combination of patents, trade secrets, know-how, license agreements, and nondisclosure and other contractual provisions to protect our intellectual property rights. These rights cover our proprietary tests, processes, databases, information, and materials across our different businesses. We seek and maintain patent protection in the United States and internationally for our over 600 issued patents and pending patent applications, while also in-licensing technology, inventions, and improvements that we consider important to the success of our business. In addition to patent protection, we intend to use other means to protect our products, technology and know-how, including pursuing terms of marketing or data exclusivity for our products, orphan drug status (if applicable) and similar rights that are available under regulatory provisions in certain territories, including the United States and Europe. We also rely on know-how and continuing technological innovation that are protected as trade secrets to develop and maintain our competitive position.

Molecular Testing Technology Patent Portfolio

Intellectual property rights relating to the molecular testing technology include a patent portfolio consisting of 27 distinct patent families comprising more than 150 issued patents and pending applications. Of these patents and applications, the latest to expire issued U.S. patents are projected to expire in 2037 and the latest to expire U.S. patent applications, if issued, would expire in 2040, in each case, subject to potential term extensions. In general, we file our molecular testing patent applications in the United States, Europe, Canada, China, and sometimes Japan.

The patents and pending applications in this portfolio include claims that are directed to a range of molecular testing-related methods, systems and compositions, including but not limited to, the following:

 

detecting chromosomal abnormalities including copy number variations;

 

determining allele dosages;

 

determining methylation status;

 

isolating and analyzing rare cells; and

 

diagnosing pregnancy-associated conditions like preeclampsia and preterm birth.

In addition to the patents and applications described above, our intellectual property rights relating to the molecular testing business include know-how relating to proprietary assays, databases, and software products. Examples include the following:

 

Proprietary NGS and highly multiplexed polymerase chain reaction assays and panels;

 

Discovery and diagnostic algorithms;

 

Laboratory, billing, and reimbursement information systems; and

 

Variant classification, annotation, and reporting systems.

Precision Medicine Technology Patent Portfolio

Intellectual property rights relating to our precision medicine technology include a patent portfolio consisting of more than 70 distinct patent families comprising more than 500 issued or pending applications. Of these patents and applications, the latest to expire issued U.S. patents are projected to expire in 2037 and the latest to expire U.S. patent applications, if issued, would be projected to expire in 2040, in each case, subject to potential term extensions. Thirty of the families were acquired in connection with the acquisition of certain tangible and intangible assets relating to the business formerly operated by Medimetrics GmbH, Medimetrics Personalized Drug Delivery B.V., and Medimetrics Personalized Drug Delivery Inc. In general, we file our precision medicine patent applications in the following patent jurisdictions: the United States, Australia, China, Canada, Europe, and Japan; and sometimes in these additional jurisdictions: Brazil, Eurasia, Hong Kong, Israel, India, South Korea, Mexico, and Singapore.

The patents and pending applications in this portfolio include claims that are directed to a range of gastroenterology-related methods, systems, and compositions, including but not limited to, the following:

 

autonomous localization of an ingestible device in the GI tract using visible or infrared light;

 

GI sampling mechanisms and compositions, including preservatives for GI analytes;

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ingestible device assays, optics and analytics for detecting and quantifying GI analytes;

 

ingestible device drug delivery mechanisms and systems;

 

targeted topical and systemic delivery of therapeutics, including biologics, peptides, small molecules, nucleic acids, or cells for the treatment of GI conditions;

 

ingestible devices for diagnosing, treating, and aiding in the treatment of GI conditions; and

 

GI-specific drug formulations and dosing regimens.

Trademarks

Our reputation and brand awareness are very important to us. Accordingly, we invest significant resources in the protection of our trademarks. We have and will continue to pursue the registration of our trademarks, including trademarks for the name Progenity, our logo, and certain of our products, in relevant jurisdictions.

Government Regulation

Regulations Related to Clinical Laboratories

Clinical Laboratory Improvement Amendments of 1988 and State Regulation

As a clinical laboratory, we are required to hold certain federal certifications under the CLIA to conduct our business. Our clinical laboratory facility located in Ann Arbor, Michigan is CLIA certified and is accredited by CAP, a CLIA-approved accrediting organization, which means that our laboratory has been certified as following CAP guidelines in operating the laboratory and in performing tests that ensure the quality of our results.

Under CLIA, a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease or the impairment or assessment of health. CLIA requires that such laboratories obtain certification from the federal government and maintain compliance with various operational, personnel qualification, facilities administration, quality control and assurance, and proficiency testing requirements intended to ensure the accuracy, reliability, and timeliness of patient test results. CMS administers the CLIA certification program. CLIA certification is also necessary to bill state and federal healthcare programs, as well as many commercial third-party payors, for laboratory testing services.

CLIA requires that we hold a certificate that specifies the types of testing we perform and that we comply with certain standards applicable to such tests. In addition, CLIA specifies certain testing categories requiring periodic proficiency testing, and certified laboratories performing these tests must enroll in an approved proficiency testing program. To demonstrate proficiency, such laboratories must test specimens received from an outside proficiency testing organization, such as CAP, and then, submit the results back to that organization for evaluation. Failing to achieve a passing score on a proficiency test may lead to loss of certification to perform testing in the corresponding category. Furthermore, failure to comply with other proficiency testing regulations, can result in revocation of the referring laboratory’s entire CLIA certification.

In addition, as a condition of CLIA certification, our laboratory is subject to survey and inspection every other year, as well as random inspections at CMS’s discretion. The biannual survey is conducted by CMS, a CMS agent (typically a state agency), or, if the laboratory holds a CLIA Certificate of Accreditation, a CMS-approved accreditation organization. Because CLIA is user-fee funded, all costs of administering the program must be covered by the regulated facilities such as ours, including certification and survey costs.

Laboratories performing high-complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. A high-complexity laboratory like ours that is certified under CLIA may develop, validate, and use proprietary tests referred to as LDTs. Under current federal policy, FDA premarket review of LDTs is not required, but laboratories may voluntarily submit 510(k) or PMA applications, or de novo classification requests, for LDTs to obtain FDA clearance or approval following a demonstration of clinical validity. On the other hand, the CLIA program requires laboratories to demonstrate the analytical validity of any LDT used in clinical testing. All of our current products are LDTs.

CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality control procedures, facility requirements, or prescribe record maintenance requirements.

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California Laboratory Licensing

In addition to federal certification requirements for laboratories under CLIA, licensure is required and maintained for our clinical laboratory under California law because we receive specimens for testing from California. The California licensure law establishes standards for the day-to-day operation of a clinical laboratory, including the training and skills required of personnel and quality control. In addition, California law mandates proficiency testing, which involves testing of specimens that have been specifically prepared for the laboratory.

If a clinical laboratory is out of compliance with California standards, the California Department of Public Health, Laboratory Field Services branch, may suspend, restrict, or revoke its license to operate the clinical laboratory, assess substantial civil money penalties, or impose specific corrective action plans.

New York Laboratory Licensing

Our laboratory receives specimens from New York state, and so we are required to maintain a New York clinical laboratory license, under New York laws and regulations, which establish standards for: (1) day-to-day operation of a clinical laboratory, including training and skill levels required of laboratory personnel; (2) physical requirements of a facility; (3) equipment; and (4) validation and quality control.

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. If a laboratory is out of compliance with New York statutory or regulatory standards, the New York State Department of Health may suspend, limit, revoke or annul the laboratory’s New York license, censure the holder of the license or assess civil money penalties. Statutory or regulatory noncompliance may result in a laboratory’s operator being found guilty of a misdemeanor under New York law. The New York State Department of Health also must approve each specific LDT before the test is offered in New York.

Other State Laboratory Licensing Laws

In addition to New York and California, other states, including Maryland, Pennsylvania, and Rhode Island, require licensing of out-of-state laboratories under certain circumstances. We have obtained licenses in these additional states and believe we are in compliance with applicable licensing laws.

Potential sanctions for violation of state statutes and regulations include significant fines, the disapproval of licensure applications and the suspension or loss of various licenses, certificates and authorizations, which could harm our business. CLIA does not preempt state laws that have established laboratory quality standards that are at least as stringent as federal law.

State Genetic Testing Laws

Many states have implemented genetic testing and privacy laws imposing specific patient consent requirements and protecting test results. In some cases, we are prohibited from conducting certain tests without a certification of patient consent by the physician ordering the test. Requirements of these laws and penalties for violations vary widely.

Federal Oversight of Laboratory Developed Tests

The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex, and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Clinical laboratory tests are regulated under CLIA, as administered by CMS, as well as by applicable state laws In addition, pursuant to its authority under the FD&C Act, the FDA has jurisdiction over medical devices, which include, among other things, in vitro diagnostic devices, or IVDs, intended for clinical purposes. LDTs are diagnostic tests that are designed, manufactured, and used within a single laboratory, and the FDA has regulated LDTs as a subset of IVDs. The FDA regulates, among other matters, the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion and sales and distribution of medical devices, including IVDs, in the United States to ensure that such products on the domestic market are safe and effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.

Although the FDA has statutory authority to assure that medical devices, are safe and effective for their intended uses, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FD&C Act and regulations with respect to LDTs. We believe our tests fall within the scope of the agency’s LDT definition. As a result, we believe our molecular tests are not currently subject to the FDA’s regulations and the FD&C Act provisions applicable to medical devices and IVDs.

Legislative and administrative proposals to amend 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

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for us to continue to offer our LDTs or to develop and introduce new tests as LDTs. For example, in recent years, FDA 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 outlining a method for extending regulatory oversight to LDTs. These draft guidance documents were titled “Framework for Regulatory Oversight of Laboratory Developed Tests,” or Framework Guidance, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests,” or Notification Guidance. The Framework Guidance stated that FDA intended to end its policy of enforcement discretion with respect to most LDTs and apply a risk-based regulatory compliance and enforcement approach consistent with the classification of medical devices generally in Classes I through III. The Notification Guidance would have further enabled FDA to collect information regarding the LDTs currently being offered for clinical use through a notification process, as well as to enforce its regulations for reporting safety issues and collecting information on any known or suspected adverse events related to the use of an LDT. The 2014 Framework and Notification Guidances were the subject of much controversy among the device and laboratory industries, healthcare providers, the U.S. Congress, and other stakeholders, and on November 18, 2016, the FDA announced that it would not finalize either guidance document. On January 13, 2017, FDA released a document titled “Discussion Paper on Laboratory Developed Tests,” or the Discussion Paper, which stated that the agency had declined to finalize the LDT guidances to allow for additional discussion on appropriate regulatory oversight. The Discussion Paper presented a more focused approach to LDT oversight, and stated that under the FDA’s current thinking, LDTs marketed before any regulatory framework becomes effective would not be expected to comply with the requirements. In addition, the FDA continued to caution against the use of pharmacogenetic tests that had not been reviewed by the FDA and raised concerns about the clinical validation of high-risk tests that purport to predict a drug response but that may be inconsistent with FDA-approved drug labeling.

In April 2017, Congress released a discussion draft of the Diagnostic Accuracy and Innovation Act, or DAIA, the first legislative attempt to reform the regulatory framework for LDTs and IVDs since the FDA proposed to overhaul its policy of enforcement discretion with respect to LDTs. DAIA sought to carve LDTs and certain IVDs out of the current definition of “medical devices” by codifying a new defined term, in vitro clinical tests, or IVCTs. IVCTs would constitute products currently regulated as IVDs and LDTs, and such products would be regulated differently from medical devices. DAIA proposed a three-tiered risk classification system with corresponding premarket review pathways for each tier. It also sought to establish jurisdictional boundaries between the FDA, CMS, and the states, with FDA oversight over development and manufacturing, CMS oversight over laboratory operations, and individual state oversight over medical use and interpretation. In August 2018, the FDA provided technical drafting assistance on DAIA, issuing comments in the form of a revised version of the draft legislation. Unlike DAIA, the FDA’s technical assistance proposed a bifurcated risk classification for IVCTs that would eliminate the middle-risk tier, subject most high-risk IVCTs to premarket approval, and exempt most low-risk IVCTs from premarket review. It would also establish a precertification program that would enable an IVCT developer to be certified by the FDA, or potentially by an FDA-accredited body, as having sufficient skill at developing IVCTs, so as to not require premarket review for each individual test marketed by a certified developer. If included in any enacted law, the FDA’s recommendations would also centralize the FDA’s jurisdiction, giving the FDA authority to withdraw approvals, request raw data, and take corrective action against test developers. In December 2018, legislators released a discussion draft of a new bill, the Verifying Accurate, Leading-edge IVCT Development, or VALID, Act, which largely incorporated the FDA’s proposals, and in April 2019, HHS, issued technical assistance comments on the VALID Act, which largely expressed support for maintaining the FDA’s jurisdiction over IVCTs and the proposed precertification program. Even if passed by Congress and signed in to law, many of the proposals in the VALID Act, including the proposed requirements for premarket review and precertification of IVCTs, may take time to be worked out and fully implemented by the FDA, CMS and other regulatory authorities.

In August 2020, HHS announced that the FDA will not require premarket review for any LDTs without first conducting notice-and-comment rulemaking proceedings. As a result, the FDA may not rely on guidance documents, policy statements, or other informal decision-making to impose premarket review requirements on LDTs. It remains to be seen whether the Biden administration will continue this HHS policy. The HHS announcement applies to all LDTs, including LDTs relating to the COVID-19 pandemic, and the FDA subsequently announced that it would no longer review EUA requests for COVID-19 LDTs. While the HHS announcement permits laboratories to use LDTs without an EUA or FDA premarket clearance or approval, such use will not be protected by the federal Public Readiness Emergency Preparedness (PREP) Act, which provides immunity from tort liability claims (except willful misconduct) to individuals or organizations involved in the manufacture, distribution, or dispensing of medical countermeasures. Further, such use remains subject to regulation by CMS under the CLIA.

Advertising of Laboratory Services or LDTs

Whether regulated by the FDA as a Class I or Class II device or subject to FDA’s enforcement discretion as an LDT, our advertising for laboratory services and tests is subject to federal truth-in-advertising laws enforced by the Federal Trade Commission, or FTC, as well as comparable state consumer protection laws. Under the Federal Trade Commission Act, or FTC Act, the FTC is empowered, among other things, to (a) prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; and (c) gather and compile information and conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce. The FTC has very broad enforcement authority, and failure to abide by the substantive requirements of the FTC Act and other consumer protection laws

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can result in administrative or judicial penalties, including civil penalties, injunctions affecting the manner in which we would be able to market services or products in the future, or criminal prosecution.

Medical Device Regulation

Pursuant to its authority under the FD&C Act, the FDA has jurisdiction over medical devices, including IVDs and other products we are currently developing. The FDA regulates, among other things, the research, design, development, preclinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FD&C Act, also referred to as a 510(k) clearance, or FDA approval of a PMA application. Although the tests we currently market are LDTs, which are subject to the recent announcement by HHS and FDA’s enforcement discretion, we intend to develop certain product candidates, such as ingestible diagnostic products, that are subject to the FDA’s premarket review requirements applicable to medical devices.

Device Classification

Under the FD&C Act, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to safety and effectiveness.

Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to General Controls, which require compliance with the applicable portions of the FDA’s QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements.

Class II devices are those that are subject to the General Controls, as well as Special Controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These Special Controls can include performance standards, patient registries, FDA guidance documents, and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process.

Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining devices, or implantable devices, in addition to those deemed novel and not substantially equivalent following the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the General Controls and Special Controls described above. Therefore, these devices are subject to the PMA application process, which is generally more costly and time-consuming than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction.

510(k) Pathway

To obtain 510(k) clearance, we must submit a premarket notification under Section 510(k) of the FD&C Act demonstrating that the proposed device is “substantially equivalent” to a predicate device. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the 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 is sometimes required to support substantial equivalence. The FDA’s 510(k) clearance pathway usually takes from three to 12 months from the date the notification is submitted, but it can take considerably longer, depending on the extent of FDA’s requests for additional information and the amount of time a sponsor takes to fulfill them. After a 510(k) is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review, the FDA will refuse to accept the 510(k) submission. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k) premarket notification within 90 days of receiving the 510(k) submission. As a practical matter, clearance often takes longer, and clearance is never assured.

Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent to a predicate device, it will grant clearance to commercially market the device. If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process.

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After a device receives 510(k) clearance, any modification, including modification to or deviation from design, manufacturing processes, materials, packaging and sterilization that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, may require a new 510(k) clearance or, depending on the modification, could require a PMA application. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA requires a new 510(k) clearance or approval of a PMA application for any modifications to a previously cleared product, the applicant may be required to cease marketing or recall the modified device until clearance or approval is received. In addition, in these circumstances, the FDA can impose significant regulatory fines or penalties for failure to submit the requisite 510(k) or PMA application(s).

Medical device types that the FDA has not previously classified as Class I, II, or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure.

The de novo classification procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application, though in practice the process may take significantly longer. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for Special Controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that General Controls would be inadequate to control the risks and Special Controls cannot be developed.

PMA Pathway

We must submit a PMA if a device cannot be cleared through the 510(k) clearance or de novo process. A PMA application must be supported by extensive data, including, but not limited to, technical information, preclinical data, clinical trial data, manufacturing data, and labeling, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.

Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin the review. The FDA, by statute and by regulation, has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. The FDA considers a PMA or PMA supplement to have been voluntarily withdrawn if an applicant fails to respond to an FDA request for information (e.g., major deficiency letter) within a total of 360 days. Before approving or denying a PMA, an FDA advisory panel may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. The FDA is not bound by the recommendations of an advisory panel, but it considers such recommendations carefully when making decisions. Prior to approval of a PMA, the FDA may conduct a bioresearch monitoring inspection of the clinical trial data and clinical trial sites, and a QSR inspection of the manufacturing facility and processes. The FDA can delay, limit, or deny approval of a PMA application for many reasons, including:

 

the device may not be shown safe or effective to the FDA’s satisfaction;

 

the data from preclinical studies and/or clinical trials may be found unreliable or insufficient to support approval;

 

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

 

changes in FDA approval policies or adoption of new regulations may require additional data.

If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for

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several months or years while the trials are conducted and data are submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain, and lengthy and a number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing.

New PMA applications or PMA supplements may be required for modifications to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, components, materials or design of a device that has been approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the approved PMA application and may or may not require as extensive technical or clinical data or the convening of an advisory panel, depending on the nature of the proposed change.

In approving a PMA application, as a condition of approval, the FDA may also require some form of postmarket studies or postmarket surveillance, whereby the applicant follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer term safety and effectiveness data for the device. The FDA may require postmarket surveillance for certain devices approved under a PMA or cleared under a 510(k) notification, such as implants or life-supporting or life-sustaining devices used outside a device user facility, devices where the failure of which would be reasonably likely to have serious adverse health consequences, or devices expected to have significant use in pediatric populations. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution, and use.

Clinical Trials

Clinical trials are almost always required to support a PMA and are sometimes required for a 510(k) premarket notification. In the United States, these trials often require submission of an application for an IDE if the investigation involves a significant risk device. Some types of studies deemed to present “non-significant risk” are deemed to have an approved IDE—without affirmative submission of an IDE application to the FDA—once certain requirements are addressed and IRB approval is obtained. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE must be approved in advance by the FDA for a specified number of patients, unless the product candidate is deemed a non-significant risk device and is eligible for more abbreviated IDE requirements. Clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and appropriate IRBs at the clinical trial sites. Submission of an IDE will not necessarily result in the ability to commence clinical trials, and although the FDA’s approval of an IDE allows clinical testing to go forward for a specified number of subjects, it does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria.

Future clinical trials involving our product candidates will most likely require that we obtain an IDE from the FDA prior to commencing clinical trials and that the trial be conducted under the oversight of IRBs at the clinical trial sites. All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA’s GCP requirements for IRB approval and for informed consent and other human subject protections. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable, or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant marketing approval or clearance of a product candidate.

Breakthrough Devices and Safer Technologies Programs

The Breakthrough Devices Program is a voluntary program intended to expedite the review, development, assessment and review of certain medical devices that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human diseases or conditions for which no approved or cleared treatment exists or that offer significant advantages over existing approved or cleared alternatives. For Breakthrough Devices, the FDA intends to provide interactive and timely communication with the sponsor during device development and throughout the review process. FDA also intends to assign staff to be available within a reasonable time to address questions by institutional review committees concerning the conditions and clinical testing expectations applicable to the investigational use of a Breakthrough Device. In addition, all submissions for devices designated as Breakthrough Devices will receive priority review, meaning that the review of the submission is placed at the top of the appropriate review queue and receives additional review resources, as needed.

In January 2021, FDA released final guidance on the Safer Technologies Program, or STeP, which is intended for medical devices that treat or diagnose diseases or conditions that are less serious than those eligible for the Breakthrough Devices Program, including non-life-threatening or reasonably reversible conditions. STeP is modeled after the Breakthrough Devices Program and is intended to provide similar benefits, including expedited development and FDA review of submissions, for medical devices and device-led combination products that are likely to offer a safer treatment or diagnosis as compared to currently available alternatives.

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Postmarket Requirements—U.S.

After the FDA permits a device to enter commercial distribution, numerous regulatory requirements continue to apply. These include:

 

establishment registration and device listing with the FDA;

 

the FDA’s QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process;

 

labeling regulations, unique device identification requirements and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses;

 

advertising and promotion requirements;

 

Restrictions on sale, distribution or use of a device;

 

PMA annual reporting requirements;

 

PMA approval or clearance of a 510(k) for product modifications;

 

medical device reporting, or MDR, regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur;

 

medical device correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FD&C Act that may present a risk to health;

 

recall requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious adverse health consequences or death;

 

an order of repair, replacement or refund;

 

device tracking requirements; and

 

post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device.

 

Additionally, once devices are commercialized, manufacturers are subject to unannounced inspections by the FDA to determine compliance with the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file, and complaint files. Manufacturers are subject to periodic scheduled or unscheduled inspections by the FDA. A failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, manufacturing operations and the recall or seizure of products. The discovery of previously unknown problems with products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or approval or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls. In addition, the FDA can issue warning letters or untitled letters, impose injunctions, suspend regulatory clearance or approvals, ban certain medical devices, detain or seize adulterated or misbranded medical devices, order repair, replacement or refund of these devices, and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also initiate action for criminal prosecution of such violations.

There are also certain requirements of state, local, and foreign governments that must be complied with in the manufacturing and marketing of our products once we have the appropriate marketing approvals. We maintain customer complaint files, record all lot numbers of disposable products, and conduct periodic audits to assure compliance with applicable regulations. We will place special emphasis on customer training and advise all customers that device operation should be undertaken only by qualified personnel. In addition to laws and regulations in the United States, we are subject to a variety of laws and regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our product candidates.

Postmarket Requirements—EU

The regulatory review process varies from country to country and may in some cases require the submission of clinical data. Our international sales will be subject to regulatory requirements in the countries in which our product candidates are sold. These regulations will be significantly modified in the next couple of years. For example, in April 2017, the new EU Medical Devices Regulation (Regulation EU 2017/745) was adopted. The EU Medical Devices Regulation, or EU MDR, repeals and replaces the

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existing EU Medical Devices Directive (Council Directive 93/42/EEC) after a certain transition period. The EU MDR, among other things, is intended to establish a uniform, transparent, predictable, and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation. The EU MDR was originally scheduled to become applicable three years after publication (in May 2020). However, due to the uncertainty surrounding the COVID-19 pandemic, the date of application was postponed by one year to May 26, 2021. Once applicable, the new regulation 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;

 

improve the traceability of medical devices;

 

set up a central database to provide comprehensive information on products available in the EU; and

 

strengthen rules for the assessment of certain high-risk devices before they are placed on the market.

In the meantime, the current EU Medical Devices Directive continues to apply.

Drug and Biologics Regulation

Premarket Requirements—U.S.

Generally, a new drug may be marketed in the United States only if FDA has approved a NDA containing substantial evidence that the new drug is safe and effective for its intended use. A new biologic may generally only be marketed in the United States if FDA has approved a BLA containing substantial evidence that the biologic is safe, pure, and potent for its intended use. The results of preclinical studies and clinical trials, along with information regarding the manufacturing process, analytical tests conducted on the chemistry of the drug, proposed labeling and other relevant information are submitted to the FDA as part of an NDA/BLA, and FDA review and approval of the NDA/BLA is necessary prior to any commercial marketing or sale of a drug or biologic in the United States.

The process generally required by the FDA before a biologic or drug product candidate may be marketed in the United States involves the following:

 

completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s Good Laboratory Practice, or GLP, requirements, the Animal Welfare Act, and other laws and regulations, as applicable;

 

submission to the FDA of an IND which must become effective before human clinical trials may begin and must be updated at least once annually;

 

approval by an IRB, or ethics committee at each clinical site before the trial is initiated;

 

performance of adequate and well-controlled clinical trials in accordance with the FDA’s GCP requirements and other applicable regulations to establish the safety, purity and potency of the proposed biologic, and the safety and efficacy of the proposed drug for each indication;

 

preparation of and submission to the FDA of a BLA or NDA after successful completion of all pivotal clinical trials;

 

satisfactory completion of an FDA Advisory Committee review, if applicable;

 

a determination by the FDA within 60 days of its receipt of an NDA or BLA to file the application for substantive review;

 

satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the proposed product candidate is produced to assess cGMP and to assure that the facilities, methods and controls are adequate for manufacturing of the drug or biologic according to its specifications; and

 

FDA review and approval of the BLA or NDA prior to any commercial marketing or sale of the biologic or drug product in the United States.

Preclinical Testing

Before testing any compound or biologic in human subjects in the United States, we must generate extensive preclinical data. Preclinical testing generally includes laboratory evaluation of product chemistry and formulation, as well as toxicological and pharmacological studies in several animal species to assess the quality and safety of the product candidate. Certain animal studies must be performed in compliance with the FDA’s GLP regulations and the U.S. Department of Agriculture’s Animal Welfare Act.

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IND Submission

Human clinical trials for drugs or biologics in the United States cannot commence until an IND is submitted and becomes effective. A company must submit preclinical testing results, together with manufacturing information and analytical data, to the FDA as part of the IND, and the FDA must evaluate whether there is an adequate basis for testing the drug in initial clinical studies in human volunteers. The sponsor will also include a protocol detailing, among other things, the objectives of the initial clinical trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated, if the initial clinical trial lends itself to an efficacy evaluation. Some preclinical testing may continue even after the IND is submitted. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to the proposed clinical studies. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before clinical studies can begin. Once human clinical trials have commenced, the FDA may stop the clinical trials by placing them on “clinical hold” because of concerns about the safety of the product candidate being tested, or for other reasons.

Clinical Trials

Clinical trials involve the administration of the drug to healthy human volunteers or to patients, under the supervision of a qualified investigator. The conduct of clinical trials is subject to extensive regulation, including compliance with the FDA’s bioresearch monitoring regulations and GCP requirements, which establish standards for conducting, recording data from, and reporting the results of, clinical trials, and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, and well-being of study participants are protected. Clinical trials must be conducted under protocols that detail the study objectives, parameters for monitoring safety, and the efficacy criteria, if any, to be evaluated. Each protocol is reviewed by the FDA as part of the IND. In addition, each clinical trial must be reviewed and approved by, and conducted under the auspices of an IRB. Companies sponsoring the clinical trials, investigators, and IRBs also must comply with, as applicable, regulations and guidelines for obtaining informed consent from the study subjects, following the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting of adverse events. Foreign studies conducted under an IND must meet the same requirements that apply to studies being conducted in the United States. Data from a foreign study not conducted under an IND may be submitted in support of an NDA or BLA if the study was conducted in accordance with GCP requirements and the FDA is able to validate the data.

A study sponsor is required to publicly post certain details about clinical trials and clinical trial results on government or independent websites (such as http://clinicaltrials.gov). Human clinical trials typically are conducted in three or four sequential phases, although the phases may overlap with one another:

 

Phase 1 clinical trials include the initial administration of the investigational drug or biologic to humans, typically to a small group of healthy human subjects, but occasionally to a group of patients with the targeted disease or disorder. Phase 1 clinical trials generally are intended to determine the metabolism and pharmacologic actions of the drug or biologic, the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness.

 

Phase 2 clinical trials generally are controlled studies that involve a relatively small sample of the intended patient population, and are designed to develop data regarding the product candidate’s effectiveness, to determine dose response and the optimal dose range, and to gather additional information relating to safety and potential adverse effects.

 

Phase 3 clinical trials are conducted after preliminary evidence of effectiveness has been obtained, and are intended to gather the additional information about safety and effectiveness necessary to evaluate the drug’s overall risk-benefit profile for a particular use, and to provide a basis for physician labeling. Generally, Phase 3 clinical development programs consist of expanded, large-scale studies of patients with the target disease or disorder to obtain statistical evidence of the efficacy and safety of the drug at the proposed dosing regimen, or the safety, purity, and potency of a biological product candidate.

 

Phase 4 clinical trials may be conducted in some cases, including where the FDA conditions approval of an NDA or BLA for a product candidate on the sponsor’s agreement to conduct additional clinical studies after approval. In other cases, a sponsor may voluntarily conduct additional clinical studies after approval to gain more information about the product candidate. Such post-approval studies are typically referred to as Phase 4 clinical trials.

A pivotal trial is a clinical study that is designed to generate substantial evidence of product candidate’s safety and efficacy to meet regulatory agency requirements and serve as the basis for approval of the product candidate. Generally, pivotal trials are Phase 3 trials, but the FDA may accept results from Phase 2 trials if the trial design provides a well-controlled and reliable assessment of clinical benefit, particularly in situations where there is an unmet medical need and the results are sufficiently robust.

The sponsoring company, the FDA, or the IRB may suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Further, success in early-stage clinical trials does not assure success in later-stage clinical trials. Data obtained from clinical activities are not always conclusive and may be subject to alternative

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interpretations that could delay, limit, or prevent regulatory approval. Additionally, some clinical studies are overseen by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board or data monitoring committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access to certain data from the trial. We may also suspend or terminate a clinical study based on safety or efficacy concerns, evolving business objectives and/or competitive climate.

During the development of a new drug or biologic, sponsors may seek opportunities to meet with the FDA at certain points. These points may be prior to submission of an IND, at the end of Phase 2, and before an NDA or BLA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and the FDA to reach agreement on the next phase of development. For example, sponsors typically use the meetings at the end of the Phase 2 trial to discuss Phase 2 clinical results and present plans for the pivotal Phase 3 clinical trial that they believe will support approval of the new drug or biologic.

Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality, and purity of the final drug. In addition, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life. While the IND is active and before approval, progress reports summarizing the results of the clinical trials and nonclinical studies performed since the last progress report must be submitted at least annually to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the same or similar drugs, findings from animal or in vitro testing suggesting a significant risk to humans, and any clinically important increased incidence of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.

There are also requirements governing the reporting of ongoing clinical trials and completed trial results to public registries. Sponsors of certain clinical trials of FDA regulated products are required to register and disclose specified clinical trial information, which is publicly available at www.clinicaltrials.gov. Information related to the product, patient population, phase of investigation, trial sites and investigators and other aspects of the clinical trial is then made public as part of the registration. Sponsors are also obligated to disclose certain results of their clinical trials after completion.

NDA/BLA Submission and Review

After completing clinical testing of an investigational drug or biologic, a sponsor must prepare and submit an NDA or BLA for review and approval by the FDA. The NDA is a comprehensive, multi-volume application that includes, among other things, the results of preclinical and clinical studies, information about the drug’s composition, and plans for manufacturing, packaging, and labeling the drug. For certain product candidates, such as immunotherapeutic antibodies, this information is submitted in a BLA. Data can come from company-sponsored clinical studies intended to test the safety and effectiveness of a use of the product candidate, or from a number of alternative sources, including studies initiated by investigators. Under federal law, the submission of most NDAs and BLAs is subject to an application user fee, and the sponsor of an approved NDA or BLA is also subject to annual prescription drug program fees. These fees are typically increased annually. A waiver of user fees may be obtained under certain limited circumstances.

When an NDA or BLA is submitted, the FDA conducts a preliminary review to determine whether the application is sufficiently complete to be accepted for filing. If it is not, the FDA may refuse to file the application and request additional information, in which case the application must be resubmitted with the supplemental information, and review of the application is delayed.

FDA performance goals generally provide for action on a standard NDA or an original BLA submission within 10 months of the 60-day filing date, but that goal may be extended in certain circumstances. Moreover, the review process is often significantly extended by FDA requests for additional information or clarification. Before approving a BLA or NDA, the FDA typically will inspect the facility or facilities at which the product candidate is manufactured. The FDA will not approve the application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product candidate within required specifications. Additionally, before approving a BLA or NDA, the FDA will typically inspect one or more clinical sites or investigators to assure compliance with GCP requirements. If the FDA determines that the application, clinical data, manufacturing process, or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

As part of its review, the FDA may refer an NDA or BLA to an advisory committee for evaluation and a recommendation as to whether the application should be approved. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved

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and under what conditions. Although the FDA is not bound by the recommendation of an advisory committee, the agency carefully considers such recommendations when making decisions. The FDA may also determine that a REMS is necessary to ensure that the benefits of a new product candidate outweigh its risks, and the product candidate can therefore be approved. A REMS may include various elements, ranging from medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools, depending on what the FDA considers necessary for the safe use of the drug.

After review of an NDA or BLA, the FDA may decide to not approve the application and issue a Complete Response letter outlining the deficiencies in the submission. The Complete Response letter also may request additional information, including additional preclinical or clinical data. Even if such additional information and data are submitted, the FDA may decide that the NDA or BLA still does not meet the standards for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than the sponsor. Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials. Additionally, as a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug or require post-approval commitments, including the completion within a specified time period of additional Phase 4 clinical studies.

In addition, the Pediatric Research Equity Act, or PREA, requires a sponsor to conduct pediatric clinical trials for most drugs and biologics, including for a new active ingredient, new indication, new dosage form, new dosing regimen, or new route of administration. Under PREA, original NDAs, BLAs, and supplements thereto must contain a pediatric assessment unless the sponsor has received a deferral or waiver. The required assessment must evaluate the safety and effectiveness of the product for the claimed indications in all relevant pediatric subpopulations and support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The sponsor or FDA may request a deferral of pediatric clinical trials for some or all of the pediatric subpopulations. A deferral may be granted for several reasons, including a finding that the drug or biologic is ready for approval for use in adults before pediatric clinical trials are complete or that additional safety or effectiveness data needs to be collected before the pediatric clinical trials begin.

Post-approval modifications to the drug or biologic product candidate, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsor to develop additional data or conduct additional preclinical or clinical trials, to be submitted in a new or supplemental NDA or BLA, which would require FDA approval.

Expedited Development and Review Programs

The FDA has established a number of programs intended to expedite the development and review of products intended to treat serious and life-threatening diseases or conditions. First, the FDA has a Fast Track program that is designed to expedite or facilitate the process for reviewing new drug products intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. Fast Track designation applies to the product and the specific indication for which it is being studied. For a Fast Track-designated product, the FDA may consider for review sections of the NDA or BLA on a rolling basis before the complete application is submitted.

A product, including a product with a Fast Track designation, may also be eligible for other types of FDA programs intended to expedite development and review, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in the treatment, diagnosis, or prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug designated for priority review in an effort to facilitate the review. The FDA endeavors to review applications with priority review designations within six months of the filing date as compared to ten months for review of original BLAs and new molecular entity NDAs under its standard review goals.

In addition, a product may be eligible for accelerated approval. Drug and biologic products intended to treat serious or life-threatening diseases or conditions may be eligible for accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality but that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform confirmatory clinical trials after approval. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. Fast Track designation, priority review, and accelerated approval do not change the standards for approval but may expedite the development or approval process.

The FDA also designates certain products as “breakthrough therapies,” if the product is intended, alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as

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substantial treatment effects observed early in clinical development. This designation includes all of the Fast Track program features, as well as more intensive FDA interaction and guidance. The Breakthrough Therapy Designation is a distinct status from both accelerated approval and priority review, which can also be granted to the same drug if relevant criteria are met. All requests for breakthrough therapy designation will be reviewed within 60 days of receipt, and the FDA will either grant or deny the request.

Fast track designation, priority review, accelerated approval, and breakthrough therapy designation do not change the standards for approval and may not result in fast or more efficient review.

Hatch-Waxman Act

The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, establishes two abbreviated approval pathways for pharmaceutical products that are in some way follow-on or bioequivalent versions of drugs approved through the NDA process.

Generic Drugs

A generic version of an approved drug is approved by means of an abbreviated new drug application, or ANDA. An ANDA is a comprehensive submission that contains, among other things, data, and information pertaining to the active pharmaceutical ingredient, drug product formulation, specifications and stability of the generic drug, as well as analytical methods, manufacturing process validation data and quality control procedures. Premarket applications for generic drugs are termed abbreviated because they generally do not include preclinical and clinical data to demonstrate safety and effectiveness. Instead, a generic applicant must demonstrate that its product performs in the same manner as, or is bioequivalent to, the innovator drug, also referred to as a reference listed drug, or RLD. In certain situations, an applicant may obtain ANDA approval of a generic product with a strength or dosage form that differs from a referenced innovator drug pursuant to the filing and approval of an ANDA Suitability Petition. The FDA will approve the generic product as suitable for an ANDA application if it finds that the generic product does not raise new questions of safety and effectiveness as compared to the innovator product. A product is not eligible for ANDA approval if the FDA determines that it is not bioequivalent to the referenced innovator drug, if it is intended for a different use, or if it is not subject to an approved Suitability Petition. However, such a product might be approved under an NDA, with supportive data from clinical trials.

505(b)(2) NDAs

Section 505(b)(2) of the FD&C Act provides an alternate regulatory pathway to obtain FDA approval for product candidates that represent modifications to formulations or uses of previously approved drug products. Specifically, Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The applicant may rely to some extent upon the FDA’s findings of safety and effectiveness for an approved product that acts as the RLD and submit its own product-specific data—which may include data from preclinical studies or clinical trials conducted by or on behalf of the applicant—to address differences between the product candidate and the RLD. Unlike an ANDA, this does not excuse the sponsor from demonstrating the proposed product candidate’s safety and effectiveness. Rather, the sponsor is permitted to rely to some degree on the FDA’s finding that the RLD is safe and effective, and must submit its own product candidate-specific data of safety and effectiveness to an extent necessary because of the differences between the products. An NDA approved under Section 505(b)(2) may in turn serve as an RLD for subsequent applications from other sponsors.

RLD Patents

In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to list with the FDA certain patents whose claims cover the applicant’s product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations, which is referred to as the Orange Book. Any applicant who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must certify to the FDA that (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. This last certification is known as a paragraph IV certification. A notice of the paragraph IV certification must be provided to each owner of the patent that is the subject of the certification and to the holder of the approved NDA to which the ANDA or 505(b)(2) application refers. The applicant may also elect to submit a “section viii” statement certifying that its proposed label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. If the reference NDA holder and patent owners assert a patent challenge directed to one of the Orange Book listed patents within 45 days of the receipt of the paragraph IV certification notice, the FDA is prohibited from approving the application until the earlier of 30 months from the receipt of the paragraph IV certification expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the applicant. The ANDA or 505(b)(2) application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the branded reference drug has expired as described in further detail below.

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Regulatory Exclusivities

The Hatch-Waxman Act provides periods of regulatory exclusivity for products that would serve as RLDs for an ANDA or 505(b)(2) application. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a “new chemical entity,” or NCE—which is a drug that contains an active moiety that has not been approved by the FDA in any other NDA. An “active moiety” is defined as the molecule or ion responsible for the drug substance’s physiological or pharmacologic action. During this five year exclusivity period, the FDA may not accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) application for a drug with the same active moiety. An ANDA or 505(b)(2) application may be submitted after four years, however, if the sponsor of the application makes a Paragraph IV certification.

A product that is not an NCE, including a product approved through a 505(b)(2) NDA, may qualify for a three-year period of exclusivity if the NDA contains new clinical data, derived from studies conducted by or for the sponsor (other than bioavailability or bioequivalence studies), that were essential for approval. In that instance, the exclusivity period does not preclude filing or review of the ANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD. Additionally, the exclusivity applies only to the conditions of approval that required submission of the clinical data. For example, if an NDA is submitted for a product candidate that is not an NCE, but that seeks approval for a new indication, and clinical data were required to demonstrate the safety or effectiveness of the product candidate for that new application, the FDA could not approve an ANDA or 505(b)(2) application for another product candidate with that active moiety for that use.

Other Exclusivities

Pediatric Exclusivity.    Section 505A of the FD&C Act provides for six months of additional exclusivity or patent protection if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show that the product is effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection that cover the drug are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve an ANDA or 505(b)(2) application owing to regulatory exclusivity or listed patents. If and when any drug or biologic product candidate is approved, we will evaluate seeking pediatric exclusivity as appropriate.

Orphan Drug Exclusivity.    Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States or, if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making a drug or biologic product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan designation must be requested before submitting an NDA or BLA. After the FDA grants orphan designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug or biological product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or inability to manufacture the product in sufficient quantities. The orphan designation of such drug or biologic also entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user fee waivers. However, competitors, may receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan exclusivity also could block the approval of one of our product candidates for seven years if a competitor obtains approval of the same drug or biologic as defined by the FDA or if our product candidate is determined to be contained within the scope of the orphan exclusivity of the competitor’s product for the same indication or disease. Orphan drug status in the European Union has similar but not identical benefits in that jurisdiction.

The Biologics Price Competition and Innovation Act

The ACA includes a subtitle called the Biologics Price Competition and Innovation Act, which authorizes the FDA to license a biological product candidate that is biosimilar to or interchangeable with an FDA-licensed biologic through an abbreviated pathway. Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.

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Complexities associated with the larger, and often more complex, structures of biological products, as well as the processes by which such products are manufactured, pose significant hurdles to implementation of the abbreviated approval pathway that are still being addressed by the FDA.

The BPCIA establishes criteria for determining that a product candidate is biosimilar to an already-licensed biologic, or reference product, and establishes a process by which a BLA for a biosimilar product candidate is submitted, reviewed, and licensed. The BPCIA provides periods of exclusivity that protect a reference product from biosimilars competition. Under the BPCIA, the FDA may not accept a biosimilar application for review until four years after the date of first licensure of the reference product, and the biosimilar may not be licensed until at least 12 years after the reference product’s approval. During this twelve year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well controlled clinical trials to demonstrate the safety, purity, and potency of their product.

Additionally, the BPCIA establishes procedures by which the biosimilar applicant provides information about its application and product candidate to the reference product sponsor, and by which information about potentially relevant patents may be shared and litigation over patents may proceed in advance of approval. The timing of final FDA approval of a biosimilar for commercial distribution depends on a variety of factors, including whether the manufacturer of the reference product is entitled to one or more statutory exclusivity periods, during which time the FDA is prohibited from approving any product candidates that are biosimilar to the branded product. The BPCIA also provides a period of exclusivity for the first biosimilar determined by the FDA to be interchangeable with the reference product. To date, the FDA has not approved an interchangeable biosimilar product, and at this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, as these substitution practices are governed by state pharmacy law.

The contours of the BPCIA continue to be defined as the statute is implemented over a period of years. This likely will be accomplished by a variety of means, including decisions related to the statute by the relevant federal courts. The FDA has to date issued various guidance documents and other materials indicating the agency’s thinking regarding a number of issues implicated by the BPCIA. Additionally, the FDA’s approval of a number of biosimilar applications in recent years has helped define the agency’s approach to certain issues. However, the ultimate impact, implementation, and meaning of the BPCIA remains subject to significant uncertainty.

Post-Approval Regulation of Drug and Biologic Products

Once a drug or biologic is approved, it and its manufacturer will be subject to continuing regulation by the FDA. If ongoing regulatory requirements are not met or if safety problems occur after a product reaches the market, the FDA may at any time withdraw product approval or take actions that would limit or suspend marketing. Additionally, the FDA may require post-marketing studies or clinical trials if new safety information develops.

Once we are engaged in manufacturing approved drug or biologic products or their components, we must comply with applicable cGMP requirements and product-specific regulations enforced by the FDA and other regulatory agencies. Compliance with cGMP includes adhering to requirements relating to organization and training of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, quality control and quality assurance, packaging and labeling controls, holding and distribution, laboratory controls, and records and reports. The FDA regulates and inspects equipment, facilities, and processes used in manufacturing pharmaceutical or biologic products prior to approval. If, after receiving approval, a company makes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA or BLA), additional regulatory review and approval may be required. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. Failure to comply with applicable cGMP requirements and conditions of product approval may lead the FDA to seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure, or recall of products, and criminal prosecution.

The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs and biologics through, among other things, standards and regulations for direct-to-consumer advertising, advertising and promotion to healthcare professionals, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. A product candidate cannot be promoted as safe or effective for any use before it is approved. After approval, product promotion can include only those claims relating to safety and effectiveness that are consistent with the labeling approved by the FDA. Healthcare providers are permitted to prescribe drugs and biologics for “off-label” uses—that is, uses not approved by the FDA and therefore not described in the product’s labeling—because the FDA does not regulate the practice of medicine. However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off-label uses. Broadly speaking, a manufacturer may not promote a drug or biologic for off-label use, but under certain conditions may engage in non-promotional, balanced, scientific communication regarding off-label uses. Failure to comply with applicable FDA requirements and restrictions in

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this area may subject a company to adverse publicity and enforcement action by the FDA, the DOJ, or the HHS Office of Inspector General, or OIG, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug or biological products.

The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;

 

adverse publicity, fines, warning letters or holds on post-approval clinical trials;

 

refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals;

 

product seizure or detention, or refusal to permit the import or export of products; or

 

injunctions or the imposition of civil or criminal penalties.

Other Requirements

In addition, if we hold approved NDAs or BLAs and/or manufacture or distribute drug or biological products, we must comply with other regulatory requirements, including registration and listing, submitting annual reports, reporting information about adverse drug experiences, and maintaining certain records. Similar, and in some cases additional, requirements exist in other countries, including the EU.

 

EU Requirements

We must obtain the requisite marketing authorizations from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of a product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application, or CTA, much like an IND, prior to the commencement of clinical trials. In the EU, for example, a CTA must be submitted to the national health authority of each EU Member State in which the clinical trial is to be conducted and to an independent ethics committee, much like the FDA and an IRB, respectively. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed.

The requirements and process governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary from country to country. In all cases in EU Member States, for example, the clinical trials must be conducted in accordance with GCP requirements, applicable regulatory requirements, and ethical principles that have their origin in the Declaration of Helsinki. Other EU requirements include regulations concerning marketing authorizations, pricing and reimbursement, patient rights in cross-border healthcare, advertising, and promotion, interactions with physicians, bribery, and corruption.

Since the United Kingdom, or UK, has formally left the EU on January 31, 2020 and the transition period, during which EU pharmaceutical laws continued to apply to the United Kingdom, has expired on December 31, 2020, the EU pharmaceutical laws now only apply to the United Kingdom in respect of Northern Ireland as laid out in the Protocol on Ireland and Northern Ireland. The EU and the United Kingdom have concluded a trade and cooperation agreement, or TCA, which is provisionally applicable since January 1, 2021. The TCA was ratified by the UK Parliament on December 30, 2020 and awaits the final agreement of the remaining 27 EU member states.

The TCA includes provisions affecting pharmaceutical businesses (including on customs and tariffs). In addition, there are some specific provisions concerning pharmaceuticals, including the mutual recognition of Good Manufacturing Practice, or GMP, inspections of manufacturing facilities for medicinal products and GMP documents issued. The TCA does not, however, contain wholesale mutual recognition of UK and EU pharmaceutical regulations and product standards.

Since January 1, 2021, the EU laws which have been transposed into UK law through secondary legislation continue to be applicable as “retained EU law.” As there is no general power to amend these regulations, the UK government has introduced the “Medicines and Medical Devices Bill 2019 – 2021,” which seeks to address this regulatory gap through introducing regulation-making, delegated powers covering the fields of human medicines, clinical trials of human medicines, veterinary medicines and medical devices. The purpose of the bill is to enable the existing regulatory frameworks to be updated. If the bill is enacted, the powers granted under it will

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only be exercisable in relation to four pieces of legislation: the Human Medicines Regulations 2012, the Medicines for Human Use (Clinical Trials) Regulations 2004, the Medicines (Products for Human Use) Regulations 2016 and limited parts of the Medicines Act 1968 (specifically those parts which make provision related to pharmacies). It is then further restricted to amending or updating only those provisions stated in the bill, which include clinical trials.

For other countries outside of the EU, such as countries in Eastern Europe, Central and South America, or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing, and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCP requirements, applicable regulatory requirements, and ethical principles that have their origin in the Declaration of Helsinki.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, warning letters or untitled letters, injunctions, civil, administrative, or criminal penalties, monetary fines or imprisonment, suspension or withdrawal of regulatory approvals, suspension of ongoing clinical studies, refusal to approve pending applications or supplements to applications filed by us, suspension or the imposition of restrictions on operations, product recalls, the refusal to permit the import or export of our products or the seizure or detention of products.

Combination Products

A combination product is the combination of two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are combined or mixed and produced as a single entity; packaged together in a single package or as a unit; or a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication, or effect.

To determine which the FDA center or centers will review a combination product candidate submission, companies may submit a request for assignment to the FDA. Those requests may be handled formally or informally. In some cases, jurisdiction may be determined informally based on FDA experience with similar products. However, informal jurisdictional determinations are not binding on the FDA. Companies also may submit a formal Request for Designation to the FDA Office of Combination Products. The Office of Combination Products will review the request and make its jurisdictional determination within 60 days of receiving a Request for Designation.

FDA will determine which center or centers within the FDA will review the product candidate and under what legal authority the product candidate will be reviewed. Depending on how the FDA views the product candidates that are developed, the FDA may have aspects of the product candidate reviewed by the FDA’s Center for Biologics Evaluation and Research, Center for Devices and Radiological Health and Center for Drug Evaluation and Research, though one center will be designated as the center with primary jurisdiction, based on the product candidate’s primary mode of action. The FDA determines the primary mode of action based on the single mode of action that provides the most important therapeutic action of the combination product candidate—the mode of action expected to make the greatest contribution to the overall intended therapeutic effects of the combination product candidate. The review of such combination product candidates is often complex and time consuming, as the FDA may select the combination product candidate to be reviewed and regulated by one or multiple of the FDA centers identified above, which could affect the path to regulatory clearance or approval. Furthermore, the FDA may also require submission of separate applications to multiple centers.

We are developing certain product candidates, that are subject to regulation in the United States as combination products. We believe that the primary mode of action of these candidates is the drug or biologic component. We expect to seek approval for these candidates through submission of a BLA for biologic candidates and through submission of a NDA submitted under Section 505(b)(2) of the FD&C Act for small molecule candidates. Based on a pre-IND meeting, we do not expect that the FDA will require a separate marketing authorization for each constituent of these product candidates.

The post-market requirements that apply to the cleared or approved product will largely be aligned with the agency center determined to have primary jurisdiction over the product candidate and that provided marketing authorization, but manufacturers must also comply with certain post-market requirements with respect to the constituent parts of combination products. In April 2019, FDA published a final guidance document entitled Compliance Policy for Combination Product Postmarketing Safety Reporting, which is intended to assist manufacturers of combination products comply with reporting requirements applicable to such products. In December 2019, FDA issued draft guidance intended to clarify how sponsors of combination products can: establish the scientific relevance of information from another development program to support an application for FDA approval of a combination product. In December 2020, FDA issued final guidance on how sponsors of combination products can obtain feedback from FDA on scientific and regulatory questions pertaining to the combination product.

After issuing marketing authorizations, the FDA has discretion in determining post-approval compliance requirements for combination products and could thus require compliance with certain cGMP requirements as well as QSR requirements for device

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components of a combination product. Other post-market requirements analogous to those described above for medical devices and drugs/biologics will also apply, depending on the application type and center overseeing regulation of the combination product, including:

 

post-market adverse event and Medical Device Reporting requirements;

 

labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses;

 

advertising and promotion requirements;

 

restrictions on sale, distribution or use of the product;

 

requirements for recalls being conducted and recall reporting;

 

product tracking requirements;

 

post-market surveillance or clinical trials; and

 

other record-keeping requirements.

HIPAA and Other Data Privacy and Security Laws

We are subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. The regulations promulgated under HIPAA, as amended by HITECH, impose privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, healthcare clearinghouses and certain healthcare providers), and their respective “business associates,” individuals or entities that create, receive, maintain, or transmit PHI, in connection with providing a service for or on behalf of a covered entity. Under HIPAA, covered entities must also enter into agreements with their business associates, which require the business associates to protect any PHI provided by the covered entity against improper use or disclosure. Additionally, HITECH mandates the reporting of certain breaches of health information to HHS, affected individuals, and if the breach is large enough, the media.

HITECH makes specific HIPAA privacy and security requirements directly applicable to business associates. We are both a covered entity and a business associate of our covered entity customers. Under the terms of the business associate agreements into which we have entered, we have certain obligations regarding the use and disclosure of any PHI that may be provided to us, and we could incur significant liability if we do not meet such obligations.

HHS promulgated various requirements under HIPAA with which we must comply. HHS rules define standards for electronic transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information, and the use of electronic signatures. We must also follow standards for the privacy of individually identifiable health information, which limit use and disclosure of most written and oral communications, including those in electronic form, regarding a patient’s past, present or future physical or mental health or condition or disclosing healthcare provided to the individual or payment for that healthcare, if the individual may be identified from such information. In addition, HIPAA’s security standards require us to ensure the confidentiality, integrity, and availability of all electronic PHI we create, receive, maintain, or transmit, to protect against reasonably anticipated threats or hazards to the security of such information and to protect such information from unauthorized use or disclosure.

There are significant civil and criminal fines and other penalties that may be imposed for violating HIPAA. A covered entity or business associate is also liable for civil money penalties for a violation that is based on an act or omission of any of its agents, which may include a downstream business associate, as determined according to the federal common law of agency. HITECH also increased the civil and criminal penalties applicable to covered entities and business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil actions. To the extent that we submit electronic healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA and HITECH, payments to us may be delayed or denied.

Regardless of the applicability of HIPAA or other data privacy laws or regulations, failing to take what the FTC perceives to be appropriate steps to keep consumers’ personal information secure may result in the FTC bringing a claim that a company has engaged in unfair or deceptive acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, or the FTCA, 15 U.S.C. § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards. In addition, state consumer protection laws, which may or may not be modeled on the FTCA, may provide state-law causes of action for allegedly unfair or deceptive practices, among other things, including causes of action for alleged data privacy violations.

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Moreover, various state and non-U.S. laws and regulations, such as the CCPA and the EU General Data Protection Regulation (Regulation (EU) 2016/679), or GDPR, may govern the privacy and security of health information in certain circumstances. Some of these laws and regulations are more stringent than HIPAA, and many differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation.

Especially in the EU, there has been increased attention to privacy and data protection issues with the potential to directly affect our business. The GDPR, which went into effect on May 25, 2018 and imposes penalties of up to 4% of annual worldwide turnover, and related implementing laws in individual EU Member States govern the collection and use of personal health data and other personal data in the EU. The GDPR increased responsibility and liability in relation to personal data that we process. It also imposes a number of strict obligations and restrictions on the ability to process (which includes collection, analysis and transfer of) personal data, including health data from clinical trials and adverse event reporting. The GDPR also includes requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals prior to processing their personal data or personal health data, notification of data processing obligations to the national data protection authorities, and the security and confidentiality of the personal data. Further, the GDPR prohibits the transfer of personal data to countries outside of the EU that are not considered by the European Commission to provide an adequate level of data protection, including to the United States, except if the data controller meets very specific requirements. Following the Schrems II decision of the Court of Justice of the European Union on July 16, 2020, there is considerable uncertainty as to the permissibility of international data transfers under the GDPR. The European Data Protection Board has adopted draft recommendations for data controllers and processors who export personal data to third countries regarding supplementary measures to ensure compliance with the GDPR when transferring personal data outside of the European Union. These recommendations were submitted to public consultation until December 21, 2020, however it is unclear when and in which form these recommendations will be published in final form.

Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU Member States may result in significant monetary fines and other administrative penalties as well as civil liability claims from individuals whose personal data was processed. Data protection authorities from the different EU Member States may still implement certain variations, enforce the GDPR and national data protection laws differently, and introduce additional national regulations and guidelines, which adds to the complexity of processing personal data in the EU. Guidance developed at both EU level and at the national level in individual EU Member States concerning implementation and compliance practices is often updated or otherwise revised.

There is, moreover, a growing trend towards required public disclosure of clinical trial data in the EU which adds to the complexity of obligations relating to processing health data from clinical trials. Such public disclosure obligations are provided in the new Regulation (EU) No 536/2014, EMA disclosure initiatives and voluntary commitments by industry. Failing to comply with these obligations could lead to government enforcement actions and significant penalties against us, harm to our reputation, and adversely impact our business and operating results. The uncertainty regarding the interplay between different regulatory frameworks, such as the Regulation (EU) No 536/2014 and the GDPR, further adds to the complexity that we face with regard to data protection regulation.

Healthcare Fraud and Abuse Laws

The federal Anti-Kickback Statute, or AKS, makes it a crime for a provider or supplier, including a laboratory, to knowingly and willfully offer, pay, solicit, or receive renumeration, directly or indirectly, in order to induce business reimbursable under any federal healthcare program. An intentional violation of the AKS may result in imprisonment for up to ten years and/or significant criminal fines. The U.S. government may also assess civil monetary penalties under AKS and seek to exclude the provider from participation in Medicare, Medicaid, and other federal healthcare programs.

Actions that violate the federal AKS or similar laws may also involve liability under the federal False Claims Act, or FCA, which prohibits knowingly presenting or causing to be presented a false or fraudulent claim for payment of U.S. government funds. Although the AKS and FCA apply only to federal healthcare programs, a number of states have passed substantially equivalent laws in which similar types of prohibitions are made applicable to other, non-federal health plans and third-party payors.

Federal and state law enforcement authorities scrutinize arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to induce patient care referrals and opportunities. The law enforcement authorities, the courts, and Congress have also demonstrated a willingness to look behind the formalities of a transaction to determine the underlying purpose of payments between healthcare providers and actual or potential referral sources. Generally, courts have taken a broad interpretation of the scope of the federal AKS. “Renumeration” is defined broadly to include anything of value, and some courts have held that the AKS may be violated if merely one purpose of a payment arrangement is to induce future referrals.

In December 1994 and in June 2014, the OIG issued Special Fraud Alerts on arrangements for the provision of clinical laboratory services and relationships between laboratories and referring physicians. The alerts described multiple practices allegedly employed by some clinical laboratories and healthcare providers that potentially violate federal fraud and abuse laws, including the AKS. The

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OIG emphasized that when a purpose of such arrangements is to induce referrals for reimbursed laboratory testing, both the clinical laboratory and the healthcare provider may be liable under the AKS, and may be subject to criminal prosecution and exclusion from participation in Medicare and Medicaid.

Recognizing that the AKS is broad and may technically prohibit innocuous or beneficial arrangements for the provision of healthcare services, HHS developed a series of regulatory “safe harbors.” These safe harbor provisions assure healthcare providers and other parties that they may not be prosecuted under the AKS, as long as all applicable requirements are met. Although full compliance with these provisions protects against prosecution under the AKS, the failure of a transaction or arrangement to fit squarely within a specific safe harbor does not necessarily mean that it is illegal or that the OIG will pursue prosecution under the AKS. While we believe we are not in violation of the AKS, we cannot provide assurance that our relationships with healthcare professionals, hospitals, and other customers will not be subject to scrutiny or will survive regulatory challenge. If imposed for any reason, sanctions under the AKS could have a negative effect on our business.

In addition to the requirements that are discussed above, there are several other healthcare fraud and abuse laws that could have an impact on our business. The federal FCA prohibits a person from knowingly submitting or causing to be submitted false claims or making a false record or statement in order to secure payment by the federal government. In addition to actions initiated by the government itself, the statute’s “whistleblower,” or “qui tam,” provisions authorize actions to be brought on behalf of the federal government by a private party having knowledge of the alleged fraud, also known as a relator. Because a qui tam complaint is initially filed under seal, the action may be pending for some time before the defendant is even aware of the action. If the government is ultimately successful in obtaining monetary damages in the matter, or if the relator succeeds in obtaining monetary damages without the government’s involvement, the relator will receive a percentage of the recovery. Violation of the FCA may result in fines of up to three times the actual damages sustained by the government, plus significant mandatory civil penalties for each separate false claim, imprisonment, or both, and possible exclusion from government healthcare programs, including Medicare and Medicaid.

In October 2018, the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, was passed as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (the SUPPORT Act). The EKRA creates criminal penalties for knowingly and willfully paying, offering to pay, soliciting, or receiving any remuneration (including any kickback, bribe, or rebate), whether directly or indirectly, overtly or covertly, in cash or in kind, to induce a referral of an individual to a recovery home, clinical treatment facility, or laboratory, or in exchange for an individual using the services of that recovery home, clinical treatment facility, or laboratory, unless a specific exception applies. Unlike the federal AKS, the EKRA applies to all “health care benefit programs,” including private health care programs, and is not limited to government health care programs. Most of the safe harbors available under the federal AKS are not reiterated under the EKRA’s exceptions. Therefore, compliance with a federal AKS safe harbor does not guarantee protection under the EKRA. As such, the EKRA potentially expands the universe of arrangements that could be subject to enforcement under federal fraud and abuse laws. Violation of the EKRA may result in significant fines and imprisonment up to 10 years for each occurrence. Because the EKRA is a new law, there is very little additional guidance to indicate how and to what extent it will be applied and enforced by government agencies in our industry. Our relationships with healthcare professionals, sales representatives, hospitals, or customers may be subject to scrutiny under the EKRA. If imposed for any reason, sanctions under the EKRA could have a negative effect on our business.

We are also subject to a federal law called the Physician Self-Referral Law, or “Stark Law”, which prohibits, with certain exceptions, “self-referrals,” which in our case means payments made by a laboratory to a physician in exchange for the provision of clinical laboratory services, presenting or causing to be presented claims to Medicare and Medicaid for laboratory tests referred by physicians who personally, or through a family member, have an investment interest in, or a compensation arrangement with, the clinical laboratory performing the tests. A person who attempts to circumvent the Stark Law may be subject to significant fines for each arrangement or scheme that violates the statute. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violation of the Stark Law is subject to significant civil monetary penalties on a per violation basis, plus up to three times the amount of reimbursement claimed, and possible exclusion from government healthcare programs, including Medicare and Medicaid. Claims that violate the Stark Law may not be paid by Medicare or Medicaid, and any person collecting any amounts under such claims is obligated to refund the payment. Various states have also enacted self-referral restrictions with which we have to comply and which differ from those imposed by the federal Stark Law.

While we have attempted to comply with the federal fraud and abuse laws, and similar laws of other states, some of our arrangements could be subject to regulatory scrutiny, and we cannot provide assurance that we will be found to be in compliance with these laws following regulatory review.

Further, in addition to the privacy and security regulations stated above, HIPAA created two federal crimes: (1) healthcare fraud and (2) false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully defrauding a healthcare benefit program, including private payors. A violation of this statute may result in fines, imprisonment, or exclusion from government healthcare programs. The false statements statute prohibits knowingly and willfully falsifying, concealing, or covering up

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a material fact or making a materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. A violation of this statute may result in fines or imprisonment.

Finally, federal law prohibits any entity from offering or transferring to a Medicare or Medicaid beneficiary any remuneration that the entity 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, including waivers of copayments and deductible amounts (or any part thereof) and transfers of items or services for free or for other than fair market value. Any violation of these prohibitions may result in significant civil monetary penalties for each wrongful act. Although we believe that our sales and marketing practices comply in all materials respects with all applicable federal and state laws and regulations, regulatory authorities may disagree. Any identified violation of applicable fraud and abuse laws could result in significant fines or our exclusion from Medicare, Medicaid, and other governmental programs, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

Regulations Related to Our Precision Medicine Business

Due to the variety of product candidates that we are developing, we and our product candidates will be subject to a wide variety of regulations promulgated by the FDA. Specifically, our product candidates are subject to regulation by the FDA’s Center for Biologics Evaluation and Research, Center for Devices and Radiological Health and Center for Drug Evaluation and Research, as well as other non-U.S. regulatory bodies (should we develop the product candidates and seek to obtain regulatory clearances or approvals to market outside of the United States).

Avero Diagnostics Relationship and the Corporate Practice of Medicine

Through one of our wholly-owned subsidiaries, we have a contractual relationship with Mattison Pathology, LLP, dba Avero Diagnostics, a professional partnership organized in Texas. In accordance with the terms of a management services agreement, we provide certain management services, including required office functions, to Avero Diagnostics and we also agree that Avero Diagnostics will be solely and exclusively in control of its provision of professional medical services and we will neither have nor exercise any control or discretion over the methods by which the physicians employed by Avero Diagnostics practice medicine. For additional information regarding our relationship with Avero Diagnostics, please see Note 3. Variable Interest Entity to our audited financial statements for the year ended December 31, 2019, included in this prospectus. A separate nominee agreement provides us the right, but not the obligation, to designate persons to purchase the stock of Avero Diagnostics at any time for a nominal amount. We receive a management fee equal to the net operating income of Avero Diagnostics. In the event that Avero Diagnostics incurs losses, we have no obligation to absorb those losses or provide additional cash support to Avero Diagnostics, but we may choose to do so and have done so in the past. We have determined that Avero Diagnostics is a variable interest entity and that Progenity is the primary beneficiary, resulting in the consolidation of Avero Diagnostics as required by the accounting guidance for consolidation.

The laws of certain states in which we operate or may operate in the future prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although we believe that we have structured our affiliation with Avero Diagnostics so that the physicians maintain exclusive authority regarding the delivery of medical care, there can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on our business. Regulatory authorities and other parties, including our associated physicians, may assert that, despite the management service agreement and other arrangements through which we operate, we are engaged in the prohibited corporate practice of medicine and/or that our contractual arrangement with Avero Diagnostics constitutes unlawful fee-splitting. If a corporate practice of medicine or fee-splitting law is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate our relationship with Avero Diagnostics to bring its activities into compliance with such law. A determination of noncompliance, the termination of or failure to successfully restructure this relationship could result in disciplinary action, penalties, damages, fines, and/or a loss of revenue, any of which could have a material adverse effect on our business, financial condition, or operating results.

Environmental Matters

Our operations require the use of hazardous materials (including biological materials), which materials subject us to a variety of federal, state, and local environmental and safety laws and regulations. Some of these laws and regulations provide for strict liability, potentially holding a party liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others’, business operations should contamination of the environment or individual exposure to hazardous materials occur. We cannot predict how new, or changes in, laws or regulations will affect our business, operations, or the cost of compliance.

Facilities

Our headquarters are located in San Diego, California, where we lease 25,795 square feet of office space. Our lease expires in June 2023.

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We own property in Ann Arbor, Michigan that we use for laboratory testing and research and such property is subject to a mortgage. We also lease approximately 26,000 square feet of office space in Ann Arbor, Michigan. Our lease expires in October 2023, and we have an option to extend it through at least October 2028.

We own property located in Lubbock, Texas that we use for the purpose of laboratory testing for Avero Diagnostics and such property is subject to a mortgage. We also lease approximately 42,000 square feet of laboratory testing and research space for Avero Diagnostics in Irving, Texas. Our lease expires in November 2022, and we have an option to extend it through November 2027.

We believe that our current facilities are adequate for our needs. We also believe we will be able to obtain additional space, as needed, on commercially reasonable terms.

Employees

As of December 31, 2020, we had 649 employees, 635 of which are full-time employees. None of our employees are represented by a labor union or covered by a collective bargaining agreement with respect to his or her employment with us. We consider our relationship with our employees to be good.

Corporate Information

We were incorporated in Delaware in January 2012 under the name Ascendant MDx, Inc., and we later changed our name in August 2013 to Progenity, Inc. Through our predecessor, Ascendant MDx, a California corporation, we commenced our operations in 2010. Our principal executive offices are located at 4330 La Jolla Village Drive, Suite 200, San Diego, CA 92122, and our telephone number is (855) 293-2639. Our website is www.progenity.com. Information contained on or accessible through our website is not a part of this Annual Report, and the inclusion of our website address in this Annual Report is an inactive textual reference only.

We file electronically with the SEC our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We make available on our website at www.progenity.com, under “Investors,” free of charge, copies of these reports as soon as reasonably practicable after filing or furnishing these reports with the SEC.

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

We are an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, less extensive disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisory vote on executive compensation, and exemptions from stockholder approval of any golden parachute payments not previously approved. We may also elect to take advantage of other reduced reporting requirements in future filings. As a result, our stockholders may not have access to certain information that they may deem important and the information that we provide to our stockholders may be different than, and not comparable to, information presented by other public reporting companies. We could remain an emerging growth company until the earlier of (1) the last day of the year following the fifth anniversary of the completion of our initial public offering, (2) the last day of the year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

In addition, the JOBS Act also provides that an emerging growth company may take advantage of the extended transition period provided in the Securities Act for complying with new or revised accounting standards. An emerging growth company may therefore delay the adoption of certain accounting standards until those standards would otherwise 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.

We are also a smaller reporting company, as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

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Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including “Management’s Discussion & Analysis” and our financial statements and related notes, before deciding to make an investment decision with respect to shares of our common stock. If any of the following risks actually occurs, our business, financial condition, operating results, reputation, and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment. We caution you that the risks, uncertainties and other factors referred to below and elsewhere in this Annual Report on Form 10-K may not contain all of the risks, uncertainties and other factors that may affect our future results and operations. Moreover, new risks will emerge from time to time. It is not possible for our management to predict all risks.

Risk Factor Summary

 

The recent and ongoing COVID-19 pandemic could further materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our business could be adversely affected by the effects of other future health epidemics or pandemics in regions where we or third parties on which we rely have significant business operations.

 

We currently receive and expect to continue to receive a significant portion of our revenues from our women’s health-related NIPT and carrier screening products, and if our efforts to further increase the use and adoption of these products fail, our business will be harmed.

 

We have incurred losses in the past, and we may not be able to achieve or sustain profitability in the future.

 

We operate in a highly competitive business environment.

 

Our success depends on our ability to improve and enhance our current products and develop new product candidates, which is complex and costly and the results are uncertain.

 

We are still developing our precision medicine platform and to date have generated no precision medicine products or product revenue. There can be no assurance that we will develop any precision medicine products that deliver diagnostic or therapeutic solutions, or, if developed, that such product candidates will be authorized for marketing by regulatory authorities, or will be commercially successful. This uncertainty makes it difficult to assess our future prospects and financial results.

 

Operating our business will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control. We expect to need to raise additional capital, and if we cannot raise additional capital when needed, we may have to curtail or cease operations.

 

Our outstanding debt, and any new debt, may impair our financial and operating flexibility.

 

Although we have implemented compliance policies and have an internal audit function, we cannot ensure that our employees will fully adhere to such policies.

 

We have increased the size of our organization and expect to further increase it in the future, and we may experience difficulties in managing this growth. If we are unable to manage the anticipated growth of our business, our future revenue and operating results may be adversely affected.

 

We may not be able to obtain and maintain the third-party relationships that are necessary to develop, commercialize, and manufacture some or all of our product candidates.

 

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

 

If third-party payors do not adequately reimburse for our products, they might not be purchased or used, which may adversely affect our revenue and profitability.

 

We may be unable to expand or maintain third-party payor coverage and reimbursement for our Innatal, Preparent, and other tests.

 

If we or our commercial partners act in a manner that violates healthcare laws or otherwise engage in misconduct, we could face substantial penalties and damage to our reputation, and our business operations and financial condition could be adversely affected.

 

Third-party claims of intellectual property infringement could result in litigation or other proceedings, which would be costly and time-consuming, and could limit our ability to commercialize our products.

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Risks Related to Our Business and Industry

The recent and ongoing COVID-19 pandemic could further materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our business could be adversely affected by the effects of other future health epidemics or pandemics in regions where we or third parties on which we rely have significant business operations.

Our business and its operations, including but not limited to our laboratory operations, sales and marketing efforts, supply chain operations, research and development activities, and capital raising activities, could be adversely affected by health epidemics in regions where we have business operations, and such health epidemics could also cause significant disruption in the operations of third parties with whom we do business, including third parties upon whom we rely. For example, in December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to other countries and throughout the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the U.S. government imposed restrictions on travel between the United States, Europe, and certain other countries. Since March 2020, numerous state and local jurisdictions, including the jurisdictions where our headquarters and laboratories are located, have imposed, and others in the future may impose, quarantines, shelter-in-place orders, executive, and similar government orders for their residents to control the spread of COVID-19.

In response to these public health directives and orders, we have implemented work-from-home policies for most of our employees. The effects of the executive orders, the shelter-in-place orders, and our work-from-home policies have negatively impacted, and may further negatively impact, productivity, and our preclinical and clinical programs and timelines, and disrupt our business in other ways, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition. We continue to monitor state and local quarantine, shelter-in-place, executive, and similar government orders and will reopen our offices to allow employees to return to the office, as needed, in accordance with our reopening plan, which is based on a phased approach that is appropriately tailored for each of our offices, with a focus on state and local orders, employee safety and optimal work environment.

Quarantines, shelter-in-place, executive, and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases, could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials we use or require to conduct our business, including product development, which would disrupt our supply chain. In particular, some of our suppliers of certain materials used in our laboratory operations and research and development activities are located in areas that are subject to executive orders and shelter-in-place orders. While many of these materials may be obtained from more than one supplier, port closures and other restrictions resulting from the COVID-19 pandemic or future pandemics may disrupt our supply chain or limit our ability to obtain sufficient materials to operate our business. To date, we are aware of certain suppliers for our research and development activities who have experienced operational delays directly related to the COVID-19 pandemic.

The spread of COVID-19, which has caused a broad impact globally, has affected and may further materially affect us economically, including a continuing and significant reduction in laboratory testing volumes. In addition, reimbursements for our tests have been delayed and may continue to be delayed if third-party payors’ processing continues to be impacted by the COVID-19 pandemic and work-from-home policies and other operational limitations mandated by federal, state, and local governments as a result of the pandemic. While the potential economic impact brought by COVID-19, and the duration of such impact, may be difficult to assess or predict, the widespread pandemic has resulted in significant disruption of global financial markets, which could reduce our ability to access capital and negatively affect our future liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 and related government orders and restrictions could materially affect our business and the value of our common stock.

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In addition, our preclinical and clinical trials have been and may continue to be affected by the COVID-19 pandemic. For example, while we originally intended to commence our pilot clinical study for PIL Dx in 2020, that timeline was delayed due to circumstances and uncertainties created by the COVID-19 pandemic and we now expect to instead commence this study in 2021. If COVID-19 continues to spread in the United States and elsewhere, we may experience additional disruptions that could severely impact our business, preclinical studies and clinical trials, including:

 

delays in receiving authorization from local regulatory authorities to initiate our planned clinical trials;

 

delays or difficulties in enrolling patients in our clinical trials;

 

delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;

 

delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;

 

changes in local regulations as part of a response to the COVID-19 pandemic that may require us to change the ways in which our clinical trials are conducted, may result in unexpected costs, or may require us to discontinue the clinical trials altogether;

 

diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;

 

interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others, or interruption of clinical trial subject visits and study procedures, the occurrence of which could affect the integrity of clinical trial data;

 

risk that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events;

 

interruptions or delays in preclinical studies due to restricted or limited operations at our research and development laboratory facilities;

 

delays in necessary interactions with local regulators, ethics committees, and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;

 

limitations in employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;

 

refusal of the U.S. Food and Drug Administration, or FDA, to accept data from clinical trials in affected geographies; and

 

interruption or delays to our sourced discovery and clinical activities.

The COVID-19 pandemic continues to evolve rapidly. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems, or the global economy as a whole.

We currently receive and expect to continue to receive a significant portion of our revenues from our women’s health-related NIPT and carrier screening products, and if our efforts to further increase the use and adoption of these products fail, our business will be harmed.

We currently receive and expect to continue to receive a significant portion of our revenues from the sales of our women’s health-related NIPT product, Innatal, and our carrier screening products, including Preparent. We undertake efforts to increase the awareness and adoption of Innatal and Preparent among laboratories, clinics, clinicians, physicians, payors, and patients. Continued and additional market acceptance of Innatal and Preparent and our ability to attract new customers are key elements to our future success. The market demand for NIPT and carrier screening tests has grown in recent years and is evolving. For example, in August 2020, ACOG issued a new set of guidelines recommending that prenatal aneuploidy screening be offered to all pregnant women regardless of their age or other risk factors. However, this market trend may not continue. Demand for Innatal and Preparent is affected by a number of factors, many of which are beyond our control, including the recommendation of our products by physicians, the timing and development of new products by our competitors, and reimbursement from payors. Despite the recent ACOG guidelines, payors may elect not to cover prenatal aneuploidy screening for average risk women and such recommendations may not result in an increase in market demand.

Our ability to increase sales of our products and establish greater levels of adoption and reimbursement for our products is

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uncertain for many reasons, including, among others:

 

we may be unable to demonstrate to laboratories, clinics, clinicians, physicians, payors, and patients that our products are superior to alternatives with respect to value, convenience, accuracy, scope of coverage, and other factors;

 

third-party coverage and reimbursement are currently primarily limited to high-risk pregnancies and, despite recent ACOG guidelines regarding average-risk pregnancies, may not gain acceptance for use in the average-risk pregnancy population or for the screening of microdeletions, limiting the overall addressable market;

 

third-party payors may set the amounts of reimbursement at prices that reduce our profit margins or do not allow us to cover our expenses;

 

we may not be able to maintain and grow effective sales and marketing capabilities;

 

our sales and marketing efforts may fail to effectively reach customers or communicate the benefits of our products;

 

superior alternatives to our products may be developed and commercialized;

 

we may experience supply constraints, including due to the failure of our key suppliers to provide required sequencing instruments and reagents;

 

the FDA may initiate rulemaking to impose premarket review, clearance, or approval or other requirements over laboratory developed tests, or LDTs; and

 

the FDA or other U.S. or foreign regulatory or legislative bodies may adopt new regulations or policies or take other actions that impose significant restrictions on our ability to market our products.

If the market and our market share for our women’s health-related NIPT and carrier screening products fail to grow or grow more slowly than expected, our business, operating results, and financial condition would be adversely affected.

In addition, as our products may have different reimbursement rates and reimbursement amounts, a change in product mix could negatively impact our average selling price and total revenue. For example, during the COVID-19 pandemic, which has caused an overall decrease in demand for our products, demand for our NIPT product has been more resilient than for our carrier screening products, leading to a higher proportion of NIPT tests in our product mix. The average reimbursement rate for our NIPT product tends to be slightly lower than for our carrier screening products. In addition, we added COVID-19 testing to our product mix, which has a lower reimbursement amount per test. As a result, our average selling price and revenue was negatively impacted.

We have incurred losses in the past, and we may not be able to achieve or sustain profitability in the future.

In the future, we expect to incur significant costs in connection with the development, approval, and commercialization of enhanced, improved, or new products. Even if we succeed in creating such products from these investments, those innovations still may fail to result in commercially successful products.

Other than revenues from our laboratory testing business, we do not expect to generate revenues from other sources in the immediate future. It is possible that we will not generate sufficient revenue from the sale of our products to cover our costs, including research and development expenses related to furthering our product pipeline, and achieve or sustain profitability. A significant element of our business strategy is to increase and maintain our in-network coverage with third-party payors; however, the negotiated fees under our contracts with third-party payors are typically lower than the list price of our tests, and in some cases the third-party payors with whom we contract may have negative coverage determinations for some of our offerings. Therefore, being in-network with third-party payors has had, and may continue to have, an adverse impact on our revenues especially if we are unable to increase the adoption of, and obtain favorable coverage determinations and reimbursement for, our products.

Since we or any collaborators or licensees may not successfully develop additional products, obtain required regulatory authorizations, manufacture products at an acceptable cost or with appropriate quality, or successfully market and sell such products with desired margins, our expenses may continue to exceed any revenues we may receive. Our operating expenses also will increase as and if, among other things:

 

our earlier-stage product candidates move into later-stage clinical development, which is generally more expensive than early-stage development;

 

additional technologies or products are selected for development;

 

we pursue development of our molecular tests or other product candidates for new uses;

 

we increase the number of patents we are prosecuting or otherwise expend additional resources on patent prosecution or defense; or

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we acquire or in-license additional technologies, product candidates, products, or businesses.

We operate in a highly competitive business environment.

The industries in which we operate are highly competitive and require an ongoing, extensive search for technological innovation. They also require, among other things, the ability to effectively develop, test, commercialize, market, and promote products, including communicating the effectiveness, safety, and value of products to actual and prospective healthcare providers. Other competitive factors in our industries include quality and price, product technology, reputation, customer service, and access to technical information.

Our women’s health-related NIPT and carrier screening tests are molecular tests, which are used by obstetricians and gynecologists, maternal fetal medicine specialists, and in vitro fertilization specialists. The principal competition for our NIPT and carrier screening tests comes from existing testing methods, technologies, and products, including other molecular NIPT and carrier screening tests offered by our competitors. The molecular testing field is characterized by rapid technological changes, frequent new product introductions, changing customer preferences, emerging competition, evolving industry standards, reimbursement uncertainty, and price competition. Many companies in this market are offering, or may soon offer, products and services that compete with our tests, in some cases at a lower cost than ours, and healthcare providers may choose to recommend the tests of our competitors.

Moreover, established, traditional first-line testing prenatal methods, such as serum protein measurement, where doctors measure certain hormones in the blood, and invasive prenatal diagnostics tests like amniocentesis, have been used for many years and are therefore practices that are difficult to change or supplement. Our conception and pre-implantation genetic screening products face competition from various laboratories that offer or seek to offer similar solutions. We also compete against companies providing hereditary cancer screening tests. For more information on our molecular testing competitors, see Part I, Item 1. “Business—Competition in Molecular Testing.”

We expect any of our future precision medicine products to face substantial competition from major pharmaceutical companies, biotechnology companies, academic institutions, government agencies, and public and private research institutions. The larger competitors have substantially greater financial and human resources, as well as a much larger infrastructure than we do. For more information on our precision medicine competitors, see Part I, Item 1. “Business—Competition in Precision Medicine.”

Additionally, we compete to acquire the intellectual property assets that we require to continue to develop and broaden our product portfolio. In addition to our in-house research and development efforts, we may seek to acquire rights to new intellectual property through corporate acquisitions, asset acquisitions, licensing, and joint venture arrangements. Competitors with greater resources may acquire intellectual property that we seek, and even where we are successful, competition may increase the acquisition price of such intellectual property or prevent us from capitalizing on such acquisitions, licensing opportunities, or joint venture arrangements. If we fail to compete successfully, our growth may be limited.

It is possible that developments by our competitors could make our products or technologies less competitive or obsolete. Our future growth depends, in part, on our ability to provide products that are more effective than those of our competitors and to keep pace with rapid medical and scientific change. Sales of our existing products and any future products may decline rapidly if a new product is introduced by a competitor, particularly if a new product represents a substantial improvement over any of our existing products. In addition, the high level of competition in our industry could force us to reduce the price at which we sell our products or require us to spend more to market our products.

Many of our competitors have greater resources than we have. This enables them, among other things, to spread their marketing and promotion costs over a broader revenue base. In addition, we may not be able to compete effectively against our competitors because their products and services are superior. Our current and future competitors could have greater experience, technological and financial resources, stronger business relationships, broader product lines and greater name recognition than us, and we may not be able to compete effectively against them. Increased competition is likely to result in pricing pressures, which could harm our revenues, operating income, or market share. If we are unable to compete successfully, we may be unable to increase or sustain our revenues or achieve or sustain profitability.

Our success depends on our ability to improve and enhance our current products and develop new product candidates, which is complex and costly and the results are uncertain.

Effective execution of research and development activities and the timely introduction of enhanced, improved, or new products and product candidates to the market are important elements of our business strategy. However, the development of enhanced, improved, or new products and product candidates is complex, costly, and uncertain and requires us to, among other factors, accurately anticipate patients’, clinicians’, and payors’ needs, and emerging technology trends. For more information on our current research and development efforts, see Part I, Item 1. “Business—Our Research and Development Activities.”

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In the development of enhanced, improved, or new products and product candidates, we can provide no assurance that:

 

we will develop any products that meet our desired target product profile and address the relevant clinical need or commercial opportunity;

 

any products that we develop will prove to be effective in clinical trials, platform validations, or otherwise;

 

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

 

any products that we develop will be successfully marketed to and ordered by healthcare providers;

 

any products that we develop will be produced at an acceptable cost and with appropriate quality;

 

our current or future competitors will not introduce products similar to ours that have superior performance, lower prices, or other characteristics that cause healthcare providers to recommend, and consumers to choose, such competitive products over ours; or

 

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

These and other factors beyond our control could delay our launch of enhanced, improved, or new products and product candidates.

The research and development process in our industries generally requires a significant amount of time from the research and design stage through commercialization. The launch of such new products requires the completion of certain clinical development and/or assay validations in the commercial laboratory. This process is conducted in various stages, and each stage presents the risk that we will not achieve our goals and will not be able to complete clinical development for any planned product in a timely manner. Such development and/or validation failures could prevent or significantly delay our ability to obtain FDA clearance or approval as may be necessary or desired, obtain approval by entities that provide oversight over LDTs, such as the State of New York, or launch any of our planned products and product candidates. At times, it may be necessary for us to abandon a product in which we have invested substantial resources. Without the timely introduction of new product candidates and improvements or enhancements of our current products, our products may become obsolete over time and our competitors may develop products that are more competitive, in which case our business, operating results, and financial condition will be harmed.

We are still developing our precision medicine platform and to date have generated no precision medicine products or product revenue. There can be no assurance that we will develop any precision medicine products that deliver diagnostic or therapeutic solutions, or, if developed, that such product candidates will be authorized for marketing by regulatory authorities, or will be commercially successful. This uncertainty makes it difficult to assess our future prospects and financial results.

Our operations with respect to our precision medicine platform to date have been limited to developing our platform technology, undertaking preclinical studies and clinical trials, and conducting research to identify potential product candidates. To date, we have only conducted clinical trials to evaluate whether our platform localization technology enables identification of the location of our ingestible medical devices within the gastrointestinal tract as well as the function of our DDS device.

We seek to develop a suite of ingestible capsules for both diagnostic and therapeutic solutions. However, medical device and related diagnostic and therapeutic product development is a highly speculative undertaking and involves a substantial degree of uncertainty. Our precision medicine platform has not yet demonstrated an ability to generate revenue or successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields such as ours for precision medicine. Consequently, the ability to accurately assess the future operating results or business prospects of our precision medicine platform is significantly more limited than if we had an operating history or approved commercial precision medicine products. Our success in developing commercial products that are based on our precision medicine platform will depend on a variety of factors, many of which are beyond our control, including, but not limited to:

 

the outcomes from our product development efforts;

 

competition from existing products or new products;

 

the timing of regulatory review and our ability to obtain regulatory marketing authorizations of our product candidates;

 

potential side effects of our product candidates that could delay or prevent receipt of marketing authorizations or cause an approved or cleared product to be taken off the market;

 

our ability to attract and retain key personnel with the appropriate expertise and experience to potentially develop our product candidates; and

 

the ability of third-party manufacturers to manufacture our product candidates in accordance with current good manufacturing practices, or cGMP, for the conduct of clinical trials and, if approved or cleared, for successful

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commercialization.

Even if we are able to develop one or more commercial precision medicine products, we expect that the operating results of these products will fluctuate significantly from period to period due to the factors above and a variety of other factors, many of which are beyond our control, including, but not limited to:

 

market acceptance of our product candidates, if approved or cleared;

 

our ability to establish and maintain an effective sales and marketing infrastructure for our products;

 

the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;

 

our ability, as well as the ability of any third-party collaborators, to obtain, maintain and enforce intellectual property rights covering our products, product candidates and technologies, and our ability to develop, manufacture and commercialize our products, product candidates, and technologies without infringing on the intellectual property rights of others; and

 

our ability to attract and retain key personnel with the appropriate expertise and experience to manage our business effectively.

Accordingly, the likelihood of the success of our precision medicine platform must be evaluated in light of these many potential challenges and variables.

The development of new product candidates will require us to undertake clinical trials, which are costly, time-consuming, and subject to a number of risks.

The development of new product candidates, including development of the data necessary to obtain clearance or approval for such product candidates, is costly, time-consuming, and carries with it the risk of not yielding the desired results. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of clinical trials do not necessarily predict success in future clinical trials. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in earlier development, and even if we achieve positive results in earlier trials, we could face similar setbacks. The design of a clinical trial can determine whether its results will support a product candidate’s marketing authorization, to the extent required, and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses. Many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing authorization for the product candidates. Furthermore, limited results from earlier-stage studies may not predict results from studies in larger numbers of subjects drawn from more diverse populations over a longer period of time.

Unfavorable results from ongoing preclinical studies and clinical trials could result in delays, modifications, or abandonment of ongoing or future analytical or clinical trials, or abandonment of a product development program, or may delay, limit, or prevent marketing authorizations, where required, or commercialization of our product candidates. Even if we, or our collaborators, believe that the results of clinical trials for our product candidates warrant marketing authorization, the FDA and other regulatory authorities may disagree and may not grant marketing authorizations for our product candidates.

Moreover, the FDA requires us to comply with regulatory standards, commonly referred to as the Good Clinical Practice, or GCP, requirements, for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, safety, and welfare of trial participants are protected. Other countries’ regulatory agencies also have requirements for clinical trials with which we must comply. We also are required to register certain ongoing clinical trials and post the results of certain completed clinical trials on a government-sponsored database, ClinicalTrials.gov, within specified timeframes. Failure to do so can result in fines, enforcement action, adverse publicity, and civil and criminal sanctions.

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

 

we may be required to submit an investigational device exemption, or IDE, application to the FDA with respect to our medical device product candidates, 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;

 

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

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regulators and/or institutional review boards, or IRBs, 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;

 

we may not reach agreement on acceptable terms with prospective contract research organizations, or 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, including those manufacturing products or conducting clinical trials on our behalf, may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all;

 

we or our investigators may have to suspend or terminate clinical trials for various reasons, including a finding that the subjects are being exposed to unacceptable health risks or based on a requirement or recommendation from regulators, IRBs or other parties due to safety signals or noncompliance with regulatory requirements;

 

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 and/or regulatory authorities for re-examination;

 

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

 

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 devices or other materials necessary to conduct clinical trials may be insufficient, inadequate or not available at an acceptable cost, or we may experience interruptions in supply;

 

marketing authorization policies or regulations of the FDA or applicable foreign regulatory agencies may change in a manner rendering our clinical data insufficient for authorization; and

 

our products may have undesirable side effects or other unexpected characteristics.

In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting, or completing our planned and ongoing clinical trials.

Any of these occurrences may significantly harm our business, financial condition, and prospects. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.

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 therapies, including any new treatments that may be approved for the indications we are investigating. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and efficacy of a product candidate, or they may be persuaded to participate in contemporaneous clinical trials of a competitor’s product candidate. 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 also 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 at the medical institutions where the clinical trials are conducted. 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 the FDA’s GCP requirements. To the extent our collaborators or the CROs fail to enroll participants for our clinical trials, fail to

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conduct the study to GCP requirements, or are delayed for a significant time in the execution of trials, including achieving full enrollment, we may be affected by increased costs, program delays, or both. In addition, clinical trials that are conducted in countries outside the United States 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, 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.

The clinical trial process is lengthy and expensive with uncertain outcomes. We have limited data and experience regarding the safety and efficacy of our products. Results of earlier studies may not be predictive of future clinical trial results, or the safety or efficacy profile for such products.

Clinical testing is difficult to design and implement, can take many years, can be expensive, and carries uncertain outcomes. The results of preclinical studies and clinical trials of our products conducted to date and ongoing or future studies and trials of our current, planned, or future products and product candidates may not be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Our interpretation of data and results from our clinical trials do not ensure that we will achieve similar results in future clinical trials. In addition, preclinical 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. Products in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through nonclinical studies and earlier clinical trials. Failure can occur at any stage of clinical testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned.

Interim “top-line” and preliminary data from studies or trials that we announce or publish from time to time may change as more data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publish interim “top-line” or preliminary data from preclinical studies or clinical trials. Interim data are subject to the risk that one or more of the outcomes may materially change as more data become available. We also make assumptions, estimations, calculations, and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the top-line results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Preliminary or “top-line” data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data are available. Additionally, interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could seriously harm our business.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product, and our results of operations, liquidity and financial condition. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure. Any information we determine not to disclose may ultimately be deemed significant by others with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product candidate or our business. If the top-line data that we report differ from final results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain marketing authorization for, and commercialize, product candidates may be harmed, which could seriously harm our business.

The results of our clinical trials may not support the use of our tests and other product candidates, or may not be replicated in later studies required for marketing authorizations.

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

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

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are inconsistent with certain results obtained from our previous studies, adoption of our products would suffer and our business would be harmed.

Peer-reviewed publications regarding our products and product candidates may be limited by many factors, including delays in the completion of, poor design of, or lack of compelling data from clinical studies, as well as delays in the review, acceptance, and publication process. If our products or product candidates or the technology underlying our current or future products or product candidates do not receive sufficient favorable exposure in peer-reviewed publications, or are not published, the rate of healthcare provider adoption of our tests and positive reimbursement coverage decisions for our tests and other products could be negatively affected. The publication of clinical data in peer-reviewed journals can be a crucial step in commercializing and obtaining reimbursement for tests, diagnostic and therapeutic products and other products, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any test, diagnostic or therapeutic product that is the subject of a study. The performance achieved in published studies may not be repeated in later studies that may be required to obtain FDA clearance or marketing authorizations should we decide for business reasons, or be required to submit applications to the FDA or other health authorities seeking such authorizations.

In response to the COVID-19 pandemic, we are providing molecular testing for diagnosing COVID-19 through Avero Diagnostics. The demand for such testing may decrease in the future and our investment in such testing capabilities may not pay off.

The COVID-19 pandemic has created an opportunity for our diagnostic tests and the Avero Diagnostics laboratory is providing molecular testing for diagnosing COVID-19. Avero Diagnostics' molecular testing utilizes certain third-party in-vitro diagnostics that have received Emergency Use Authorization, or EUA, from the FDA. The FDA has the authority to issue an EUA during a public health emergency if it determines that based on the totality of the scientific evidence that it is reasonable to believe that the product may be effective, that the known and potential benefits of a product outweigh the known and potential risks, that there is no adequate, approved, and available alternative, and if other regulatory criteria are met. These standards for marketing authorization are lower than if FDA had reviewed these tests under its traditional marketing authorization pathways, and we cannot assure you that these would be cleared or approved under those more onerous clearance and approval standards. Moreover, FDA's policies regarding EUAs can change unexpectedly, and FDA may revoke an EUA where it determines that the underlying health emergency no longer exists or warrants such authorization or if problems are identified with the authorized product. We cannot predict how long these authorizations will remain in place. FDA policies regarding diagnostic tests, therapies and other products used to diagnose, treat or mitigate COVID-19 remain in flux as the FDA responds to new and evolving public health information and clinical evidence. Changes to FDA regulations or requirements could require changes to authorized tests, necessitate additional measures, or make it impractical or impossible for Avero Diagnostics to continue utilizing these tests. The termination of any of the EUAs for the COVID-19 testing being run by Avero Diagnostics could adversely impact our business, financial condition and results of operations. There is no assurance that our COVID-19 diagnostic testing program will continue to be accepted by the market or that, when compared to our COVID-19 tests, other diagnostic tests will not become more accepted, produce quicker results, or be more accurate. Further, the longevity and extent of the COVID-19 pandemic is uncertain. Future demand for COVID-19 testing is becoming increasing difficult to predict due to various factors including but not limited to the availability of vaccinations, the number of individuals who choose to be vaccinated, the effectiveness of the various vaccinations against variants, the rate of new cases, and evolving government directives, laws, regulations and rules related to COVID-19 testing. In the long term, we expect that the COVID-19 pandemic will eventually dissipate and, as a result, the significance of COVID-19 testing to our business and financial results will decrease. As a result, the increase in revenue due to any increase in demand for these diagnostic tests may not be indicative of our future revenue.

Operating our business will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control. We expect to need to raise additional capital, and if we cannot raise additional capital when needed, we may have to curtail or cease operations.

In the future, we expect to incur significant costs in connection with our operations, including but not limited to the development, marketing authorization, and commercialization of new tests, medical devices, therapeutics, and other products. These development activities generally require a substantial investment before we can determine commercial viability, and the proceeds from our initial public offering, or IPO, in June 2020 and concurrent equity and convertible debt offerings in December 2020 will not be sufficient to fully fund these activities. We expect to need to raise additional funds through public or private equity or debt financings, collaborations or licensing arrangements to continue to fund or expand our operations.

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

 

the scope and duration of and expenditures associated with our discovery efforts and research and development programs, including for our precision medicine platform;

 

the costs to fund our commercialization strategies for any product candidates for which we receive marketing authorization or otherwise launch and to prepare for potential product marketing authorizations, as required;

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the costs of any acquisitions of complementary businesses or technologies that we may pursue;

 

potential licensing or partnering transactions, if any;

 

our facilities expenses, which will vary depending on the time and terms of any facility lease or sublease we may enter into, and other operating expenses;

 

the scope and extent of the expansion of our sales and marketing efforts;

 

potential and pending litigation, potential payor recoupments of reimbursement amounts, and other contingencies;

 

the commercial success of our products;

 

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

 

our ability to collect our accounts receivable.

The availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as our financial condition and market conditions in general change. There may be times when the private capital sources and the public capital markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, or at all, in which case we would not be able to access capital from these sources. In addition, a weakening of our financial condition or deterioration in our credit ratings could adversely affect our ability to obtain necessary funds. Even if available, additional financing could be costly or have adverse consequences.

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

If we are not able to obtain adequate funding when needed, we may be required to delay development programs or sales and marketing initiatives. If we are unable to raise additional capital in sufficient amounts or on satisfactory terms, we may have to make reductions in our workforce and may be prevented from continuing our discovery, development, and commercialization efforts and exploiting other corporate opportunities. In addition, it may be necessary to work with a partner on one or more of our tests or products under development, which could lower the economic value of those products to us. Each of the foregoing may harm our business, operating results, and financial condition, and may impact our ability to continue as a going concern.

Our outstanding debt, and any new debt, may impair our financial and operating flexibility.

As of each of December 31, 2020, we had approximately $171.6 million of outstanding indebtedness, composed of the amount due under our convertible notes payable and mortgages payable. Certain of our debt agreements contain various restrictive covenants and our mortgages are secured by real estate assets.

The indenture for the convertible notes does not prohibit us or our subsidiaries from incurring additional indebtedness in the future, with certain exceptions. Under the convertible notes, we will not, and we will not permit any subsidiary of ours to, create, incur, assume or permit to exist any lien on any property or asset now owned or later acquired by us or any subsidiary that secures any indebtedness for borrowed money, other than (i) secured indebtedness for borrowed money in existence on the date of the indenture; (ii) permitted refinancing indebtedness incurred in exchange for, or the net proceeds of which are used to renew, refund, refinance, replace, defease or discharge any secured indebtedness for borrowed money permitted by clause (i) of this sentence; and (iii) additional secured indebtedness for borrowed money that, in an aggregate principal amount (or accredited value, as applicable), does not exceed $15,000,000 at any time outstanding.

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Accordingly, we may incur a significant amount of additional indebtedness in the future. Our current indebtedness and the incurrence of additional indebtedness could have significant negative consequences for our stockholders and our business, results of operations and financial condition by, among other things:

 

making it more difficult for us to satisfy our obligations under our existing debt instruments;

 

increasing our vulnerability to general adverse economic and industry conditions;

 

limiting our ability to obtain additional financing to fund our research, development, and commercialization activities, particularly when the availability of financing in the capital markets is limited;

 

requiring a substantial portion of our cash flows from operations for the payment of principal and interest on our debt, reducing our ability to use our cash flows to fund working capital, research and development, and other general corporate requirements;

 

limiting our flexibility to plan for, or react to, changes in our business and the industries in which we operate;

 

further diluting our current stockholders as a result of issuing shares of our common stock upon conversion of our convertible notes; and

 

placing us at a competitive disadvantage with competitors that are less leveraged than us or have better access to capital.

Our ability to make principal and interest payments will depend on our ability to generate cash in the future. Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, and our cash needs may increase in the future. If we do not generate sufficient cash to meet our debt service requirements and other operating requirements, we may need to seek additional financing. In that case, it may be more difficult, or we may be unable, to obtain financing on terms that are acceptable to us or at all.

In addition, any future indebtedness that we may incur may contain financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.

Although we have implemented compliance policies and have an internal audit function, we cannot ensure that our employees have adhered or will fully adhere to such policies.

We have implemented compliance policies and procedures intended to train and monitor our sales, billing, marketing and other personnel. Our efforts to implement appropriate monitoring of such personnel are ongoing and we have identified and are analyzing situations in which employees may have failed to fully adhere to our policies and applicable laws in the past. For example, as part of our work to improve our compliance program and our obligations under our Corporate Integrity Agreement (as defined below), including our internal auditing and monitoring function, we commissioned a third-party analysis of our coding and billing processes. In connection with that audit, we identified that we had not timely and appropriately transitioned to the implementation of a new CPT code in 2019, and as a result we received an overpayment of approximately $10.0 million from government payors during 2019 and early 2020. We also conducted a similar review of our historic practices regarding the collection of patient responsibility amounts, including copayments and deductibles, from government health program beneficiaries between May 2018 and May 2020. We reported the overpayments identified in both audits to the Office of Inspector General of the Department of Health and Human Services, or the OIG, in compliance with our Corporate Integrity Agreement. For additional information on our transition for this CPT code, see Notes 4 and 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. There can be no assurance that we will not identify further compliance, billing, or other failures or experience similar issues in the future. Failure by our sales, billing, marketing, or other personnel to follow our policies and comply with applicable laws may subject us to administrative, civil, and criminal actions, penalties, damages, fines, individual imprisonment, exclusion from participation in federal healthcare programs, refunding of payments received by us, and curtailment or cessation of our operations. For additional information regarding recent government investigations regarding our compliance with certain policies and laws, see Part I, Item 3. “Legal Proceedings.” In addition, in the event of failure by our sales, billing, marketing, or other personnel to follow our policies and comply with applicable laws, commercial third-party payors may refuse to provide all or any reimbursement for tests administered and seek repayment from us of amounts previously reimbursed, which failures may harm our ability to secure network contracts with third-party payors. For additional information regarding recent claims by and settlement agreements with commercial payors, see Part I, Item 1. “Business—Reimbursement—Payor Dispute” and “—Commercial Third-Party Payors.” Any of the foregoing could adversely affect our revenue, cash flow, and financial condition, and reduce our growth prospects. For additional information regarding these risks, see the risk factor titled “If we or our commercial partners act in a manner that violates healthcare laws or otherwise engage in misconduct, we could face substantial penalties and damage to our reputation, and our business operations and financial condition could be adversely affected.”

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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 penalties or excluded from participation in government healthcare programs, which could harm our results of operations, liquidity and financial condition.

In connection with settlement of the government investigations described in Part I, Item 3. “Legal Proceedings,” effective July 21, 2020, we entered into a five-year corporate integrity agreement, or the Corporate Integrity Agreement, with the OIG. The Corporate Integrity Agreement 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 review organization to conduct claims and arrangements reviews; implement a risk assessment and internal review process; and submit periodic reports to the OIG regarding our compliance program and Corporate Integrity Agreement implementation. The Corporate Integrity Agreement requires us to report substantial overpayments that we discover we have received from federal health care programs, as well as probable violations of federal health care laws. See “Risk Factors—Although we have implemented compliance policies and have an internal audit function, we cannot ensure that our employees have adhered or will fully adhere to such policies.” We are in the process of implementing the processes, policies and procedures required under the Corporate Integrity Agreement. Implementing and administering such processes, policies and procedures will require significant management attention and cash and other resources. Furthermore, while we have developed and instituted a corporate compliance program, 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 Corporate Integrity Agreement. Our failure to comply with our obligations under the Corporate Integrity Agreement could result in monetary penalties and our exclusion from participating in federal healthcare programs. The costs associated with compliance with the Corporate Integrity Agreement, or any liability or consequences associated with its breach, could have an adverse effect on our operations, liquidity and financial condition.

Actual or perceived failures to comply with applicable data protection, privacy, consumer protection and security laws, regulations, standards and other requirements could adversely affect our business, results of operations, and financial condition.

The global data protection landscape is rapidly evolving, and we are or may become subject to numerous state, federal, and foreign laws, requirements, and regulations governing the collection, use, disclosure, retention, and security of personal information. Implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact future laws, regulations, standards, or perception of their requirements may have on our business. This evolution may create uncertainty in our business, affect our ability to operate in certain jurisdictions or to collect, store, transfer, use and share personal information, necessitate the acceptance of more onerous obligations in our contracts, result in liability or impose additional costs on us. The cost of compliance with these laws, regulations, and standards is high and is likely to increase in the future. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, our internal policies and procedures or our contracts governing our processing of personal information could result in negative publicity, government investigations and enforcement actions, claims by third parties and damage to our reputation, any of which could have a material adverse effect on our operations, financial performance and business.

As our operations and business grow, we may become subject to or affected by new or additional data protection laws and regulations and face increased scrutiny or attention from regulatory authorities. In the United States, the manner in which we collect, use, access, disclose, transmit and store protected health information, or PHI, is subject to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and the health data privacy, security and breach notification regulations issued pursuant to these statutes.

HIPAA establishes a set of national privacy and security standards for the protection of PHI, by health plans, healthcare clearinghouses, and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services that involve the use or disclosure of PHI. HIPAA requires healthcare providers like us to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical, and technical safeguards to protect such information.

HIPAA further requires covered entities to notify affected individuals “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach” if their unsecured PHI is subject to an unauthorized access, use or disclosure. If a breach affects 500 patients or more, covered entities must report it to the U.S. Department of Health and Human Services, or HHS, and local media without unreasonable delay (and in no case later than 60 days after discovery of the breach), and HHS will post the name of the entity on its public website. If a breach affects fewer than 500 individuals, the covered entity must log it and notify HHS at least annually. HIPAA also implemented the use of standard transaction code sets and standard identifiers that covered entities must use when submitting or receiving certain electronic healthcare transactions, including activities associated with the billing and collection of healthcare claims.

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Penalties for failure to comply with a requirement of HIPAA and HITECH vary significantly depending on the failure and could include requiring corrective actions, and/or imposing civil monetary or criminal penalties. HIPAA also authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care claim in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.

Certain states have also adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. Such laws and regulations will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. In addition, California enacted the California Consumer Privacy Act, or CCPA, on June 28, 2018, which went into effect on January 1, 2020. The CCPA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal data. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability, and many similar laws have been proposed at the federal level and proposed or enacted in other states. Any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.

In Europe, the European Union General Data Protection Regulation (2016/679), or the GDPR, went into effect in May 2018 and introduces strict requirements for processing the personal data of European Union data subjects. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Moreover, the United Kingdom leaving the European Union could also lead to further legislative and regulatory changes. It remains unclear how the United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfer to the United Kingdom from the European Union will be regulated, especially following the United Kingdom’s departure from the European Union on January 31, 2020 without a deal. However, the United Kingdom has transposed the GDPR into domestic law with the Data Protection Act 2018, which remains in force following the United Kingdom’s departure from the European Union. In addition to the GDPR, individual countries in Europe, and elsewhere in the world, including but not limited to Brazil, have enacted similar data privacy legislation that applies to data subjects in those countries. This legislation imposes increased compliance obligations and regulatory risk, including the potential for significant fines for noncompliance.

In addition, our direct communications with patients may be scrutinized under the laws and regulations governing such communications. The interpretation of many of these statutes, regulations and rulings is evolving in the courts and administrative agencies and an inability to comply may have an adverse impact on our business. For example, the Telephone Consumer Protection Act, or TCPA, imposes significant restrictions on utilizing text messages to mobile telephone numbers as a means of communication, when the prior express consent of the person being contacted has not been obtained or proof of such consent is not properly maintained. Our ability to communicate with patients may be affected by the TCPA, its implementing regulations and litigation pursuant to the TCPA. The determination by a court or regulatory agency that our SMS text messaging violates the TCPA could subject us to civil penalties, could require us to change some portions of our business and could otherwise harm our business.

Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, CROs, collaborators, or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations.

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

In the ordinary course of our business, we collect and store sensitive data, including PHI (such as patient medical records, including test results), and personally identifiable information. We also store business and financial information, intellectual property, research and development information, trade secrets and other proprietary and business critical information, including that of our customers, payors, and collaboration partners. We manage and maintain our data utilizing a combination of on-site systems, managed data center systems and cloud-based data center systems. We are highly dependent on information technology networks and systems, including the internet, to securely process, transmit, and store critical information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure, and that of our third-party billing and collections provider and other service providers, may be vulnerable to attacks by hackers, viruses, disruptions and breaches due to employee error or malfeasance.

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A security breach or privacy violation that leads to unauthorized access, disclosure or modification of, or prevents access to, patient information, including PHI, could compel us to comply with state and federal breach notification laws, subject us to mandatory corrective action and require us to verify the correctness of database contents. Such a breach or violation also could result in legal claims or proceedings brought by a private party or a governmental authority, liability under laws and regulations that protect the privacy of personal information, such as HIPAA, HITECH, and laws and regulations of various U.S. states and foreign countries, as well as penalties imposed by the Payment Card Industry Security Standards Council for violations of the Payment Card Industry Data Security Standards. If we are unable to prevent such security breaches or privacy violations or implement satisfactory remedial measures, we may suffer loss of reputation, financial loss and civil or criminal fines or other penalties because of lost or misappropriated information. In addition, these breaches and other forms of inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm of the type described above.

Unauthorized access, loss or dissemination of information could disrupt our operations, including our ability to perform tests, provide test results, bill payors or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, develop and commercialize tests, collect, process and prepare company financial information, provide information about our tests, educate patients and healthcare providers about our service, and manage the administrative aspects of our business, any of which could damage our reputation and adversely affect our business. Any breach could also result in the compromise of our trade secrets and other proprietary information, which could adversely affect our competitive position.

In addition, health-related, privacy, and data protection laws and regulations in the United States and elsewhere are subject to interpretation and enforcement by various governmental authorities and courts, resulting in complex compliance issues and the potential for varying or even conflicting interpretations, particularly as laws and regulations in this area are in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business and our reputation. Complying with these laws could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business, operating results, and financial condition.

Any failure or perceived failure by us or any third-party collaborators, service providers, contractors or consultants to comply with our privacy, confidentiality, data security or similar obligations, or any data security incidents or other security breaches that result in the accidental, unlawful or unauthorized access to, use of, release of, processing of, or transfer of sensitive information, including personally identifiable information, may result in negative publicity, harm to our reputation, governmental investigations, enforcement actions, regulatory fines, litigation or public statements against us, could cause third parties to lose trust in us or could result in claims by third parties, including those that assert that we have breached our privacy, confidentiality, data security or similar obligations, any of which could have a material adverse effect on our reputation, business, financial condition or results of operations. We could be subject to fines and penalties (including civil and criminal) under HIPAA for any failure by us or our business associates to comply with HIPAA’s requirements. Moreover, data security incidents and other security breaches can be difficult to detect, and any delay in identifying them may lead to increased harm. While we have implemented data security measures intended to protect our information, data, information technology systems, applications and infrastructure, and recently hired a Chief Information Officer to supervise such measures, there can be no assurance that such measures will successfully prevent service interruptions or data security incidents.

We have increased the size of our organization and expect to further increase it in the future, and we may experience difficulties in managing this growth. If we are unable to manage the anticipated growth of our business, our future revenue and operating results may be adversely affected.

As of December 31, 2020, we had 635 full-time employees worldwide. We have significantly expanded the size of our organization over the past several years, particularly personnel within our sales and marketing and research and development groups, and we expect to continue to do so in the future. As we transition into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial, and other personnel. Future growth would impose significant added responsibilities on members of management, including:

 

identifying, recruiting, integrating, maintaining, and motivating additional employees;

 

managing our internal development efforts effectively, while complying with our contractual obligations to contractors and other third parties; and

 

improving our operational, financial, and management controls, reporting systems, and procedures.

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Our future financial performance and our ability to successfully develop, market, and sell our products and product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities. As we continue to grow our sales force, the impact of such growth on our revenue may be delayed as a result of time needed for onboarding and training of new sales force members.

We are engaged in extensive research and development activities, including innovation within our molecular testing business as well as furthering our novel pipeline of precision medicine product candidates. Conducting these activities will entail significant organizational complexity and require extensive effort on the part of our personnel. If we are unable to execute on our operational goals it would have a material and adverse effect on our business, financial condition, results of operations, and prospects.

If we lose the services of members of our senior management team or other key employees, we may not be able to execute our business strategy.

Our success depends in large part upon the continued service of our senior management team and certain other key employees who are important to our vision, strategic direction, and culture. Our current long-term business strategy was developed in large part by our senior management team and depends in part on their skills and knowledge to implement. We may not be able to offset the impact on our business of the loss of the services of any member of our senior management or other key officers or employees or attract additional talent. The loss of any members of our senior management team or other key employees could have a material and adverse effect on our business, operating results, and financial condition.

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

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

We may not be able to obtain and maintain the third-party relationships that are necessary to develop, commercialize, and manufacture some or all of our product candidates.

We expect to depend on collaborators, partners, licensees, manufacturers, and other third parties to support our product candidate development efforts, to manufacture our product candidates and to market, sell, and distribute any products we successfully develop. Any problems we experience with any of these third parties could delay the development, commercialization, and manufacturing of our product candidates, which could harm our results of operations.

We cannot guarantee that we will be able to successfully negotiate agreements for, or maintain relationships with, collaborators, partners, licensees, manufacturers, and other third parties on favorable terms, if at all. If we are unable to obtain or maintain these agreements, we may not be able to clinically develop, manufacture, obtain regulatory authorizations for, or commercialize any future product candidates, which will in turn adversely affect our business.

We expect to expend substantial management time and effort to enter into relationships with third parties and, if we successfully enter into such relationships, to manage these relationships. In addition, substantial amounts will be paid to third parties in these relationships. However, we cannot control the amount or timing of resources our future contract partners will devote to our research and development programs, product candidates, or potential product candidates, and we cannot guarantee that these parties will fulfill their obligations to us under these arrangements in a timely fashion, if at all. In addition, while we manage the relationships with third parties, we cannot control all of the operations of and protection of intellectual property by such third parties.

We rely on third-party laboratories to perform some of our testing and further rely on third parties for sample collection, including phlebotomy services, and commercial courier delivery services, and if these services are disrupted, our business will be harmed.

A portion of our tests are performed by third-party CLIA certified laboratories. These third-party laboratories are subject to contractual obligations but are not otherwise under our control. We, therefore, do not control the capacity and quality control efforts of

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these third-party laboratories other than through our ability to enforce contractual obligations on volume and quality systems. In the event of any adverse developments with these third-party laboratories or their ability to perform this testing in accordance with the legal, regulatory, or commercial standards, our ability to provide test results to customers may be delayed, interrupted, or suspended. Any natural or other disasters, pandemics, acts of war or terrorism, shipping embargoes, labor unrest, or political instability or similar events at our third-party laboratories’ facilities that cause a loss of testing capacity would heighten the risks that we face.

Changes to or termination of our agreements or inability to renew our agreements with these parties or enter into new agreements with other laboratories that are able to perform such testing could impair, delay, or suspend our efforts to market and commercialize our tests. Such interruption could harm our reputation and lead to the loss of customers, and we may be unable to regain those customers in the future. In addition, certain third-party payors may take the position that sending out this testing to third-party laboratories is contrary to the terms of their coverage policies and/or our contract in cases where we are in-network with the payor, and may refuse to pay us for testing that we have outsourced. If any of these events occur, our business, operating results, and financial condition could suffer.

Federal and certain state laws impose anti-markup restrictions that prevent an entity from realizing a profit margin on outsourced testing. Whether we will be able to realize a profit margin on outsourced testing will be determined by the application of those laws. If we or our subsidiaries are unable to markup outsourced testing, our operating results would suffer.

Our molecular testing business depends on our ability to quickly and reliably deliver test results to our customers. We rely on third parties to perform sample collection, including phlebotomy services, and to transport samples to our laboratory facility or the third-party laboratories that we contract with in a timely and cost-efficient manner. Disruptions in these services, whether due to any natural or other disasters, pandemics, acts of war or terrorism, shipping embargoes, labor unrest, political instability, or similar events, could adversely affect specimen integrity and our ability to process samples in a timely manner and to service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.

In addition, our relationships with these third-party providers could be scrutinized under federal and state healthcare laws such as the federal Anti-Kickback Statute and the Stark Law to the extent these services provide a financial benefit to or relieve a financial burden for a potential referral source, or are subsequently found not to be for fair market value. If our operations are found to be in violation of any of these laws and regulations, we may be subject to administrative, civil and criminal penalties, damages, fines, individual imprisonment, exclusion from participation in federal healthcare programs, refunding of payments received by us, and curtailment or cessation of our operations, any of which could harm our reputation and adversely affect our business, operating results, and financial condition. For additional information regarding these risks, see the risk factor titled “If we or our commercial partners act in a manner that violates healthcare laws or otherwise engage in misconduct, we could face substantial penalties and damage to our reputation, and our business operations and financial condition could be adversely affected.”

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

We source components of our technology from third parties and certain components are sole sourced. Obtaining substitute components may be difficult or require us to re-design our products or, for any product candidates for which we may obtain marketing authorization from the FDA, obtain new marketing authorization from the FDA to use a new supplier. Any natural or other disasters, acts of war or terrorism, shipping embargoes, labor unrest or political instability or similar events at our third-party manufacturers’ facilities that cause a loss of manufacturing capacity or a reduction in the quality of the items manufactured would heighten the risks that we face. Changes to, failure to renew or termination of our existing agreements or our inability to enter into new agreements with other suppliers could result in the loss of access to important components of our tests and could impair, delay or suspend our commercialization efforts. Our failure to maintain a continued and cost-effective supply of high-quality components could materially and adversely harm our business, operating results, and financial condition.

For example, Illumina, Inc., or Illumina, in San Diego, California, is currently the sole supplier of our sequencing instruments and certain reagents for Innatal and Preparent, pursuant to a supply agreement that, unless extended by mutual agreement, expires in June 2022. Without such inputs, we would be unable to run our tests and commercialize our products. In early 2013, prior to our entering into our agreement with Illumina, Illumina completed its acquisition of Verinata Health Inc., or Verinata, a direct competitor in the NIPT market. We understand Illumina supplies the same or similar instruments and related reagents to Verinata. As a result, we face heightened risk and uncertainty regarding our supply relationship with Illumina. If required, alternative sequencing platforms may not perform as well or may be more expensive and we may be unsuccessful employing such platforms in a commercially sustainable way. Any disruptions to our laboratory performance and ability to deliver our products could adversely affect our business, operating results, financial condition, and reputation. In addition, if we were required by the FDA to obtain approval for Innatal or Preparent

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through a pre-market approval application, or PMA, we may also be required to obtain approval of a PMA supplement prior to making any changes to Innatal or Preparent as a result of implementing an alternative sequencing platform.

The manufacturing of our products, including our precision medicine product candidates, is highly exacting and complex, and we depend on third parties to supply materials and manufacture all our products and product candidates.

Manufacturing is highly exacting and complex due, in part, to strict regulatory requirements governing the manufacture of our current and future products and product candidates, including medical devices, diagnostic products, and pharmaceutical products. We have limited personnel with experience in, and we do not own facilities for, manufacturing any products. We depend upon our collaborators and other third parties, including sole source suppliers, to provide raw materials meeting FDA quality standards and related regulatory requirements, manufacture devices, diagnostic products, and drug substances, produce drug products and provide certain analytical services with respect to our products and product candidates. The FDA and other regulatory authorities require that many of our products be manufactured according to cGMP regulations and that proper procedures be implemented to assure the quality of our sourcing of raw materials and the manufacture of our products. Any failure by us, our collaborators, or our third-party manufacturers to comply with cGMP and/or scale-up manufacturing processes could lead to a delay in, or failure to obtain, marketing authorizations. In addition, such failure could be the basis for action by the FDA, including issuing a warning letter, initiating a product recall or seizure, fines, imposing operating restrictions, total or partial suspension of production or injunctions and/or withdrawing marketing authorizations for products previously granted to us. To the extent we rely on a third-party manufacturer, the risk of noncompliance with cGMPs may be greater and the ability to effect corrective actions for any such noncompliance may be compromised or delayed.

Moreover, we expect that certain of our precision medicine product candidates, including PGN-600, PGN-001, PGN-300, and PGN-OB2, are drug/device combination products that will be regulated under the drug and biological product regulations of the Federal Food, Drug, and Cosmetic Act, or the FD&C Act, and Public Health Service Act, or PHSA, based on their primary modes of action as drugs and biologics. Third-party manufacturers may not be able to comply with cGMP regulations, applicable to drug/device combination products, including applicable provisions of the FDA’s drug and biologics cGMP regulations, device cGMP requirements embodied in the Quality System Regulation, or QSR, or similar regulatory requirements outside the United States.

In addition, we or third parties may experience other problems with the manufacturing, quality control, storage or distribution of our products, including equipment breakdown or malfunction, failure to follow specific protocols and procedures, problems with suppliers and the sourcing or delivery of raw materials and other necessary components, problems with software, labor difficulties, and natural disaster-related events or other environmental factors. These problems can lead to increased costs, lost sales, damage to customer relations, failure to supply penalties, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches of products. If problems are not discovered before the product is released to the market, recalls, corrective actions, or product liability-related costs also may be incurred. Problems with respect to the manufacture, storage, or distribution of products could materially disrupt our business and have a material and adverse effect on our operating results and financial condition. For additional information regarding our third-party suppliers and manufacturers, see Part I, Item 1. “Business—Laboratories—Laboratory Supplies.”

We rely on third parties to design our product candidates and conduct our preclinical research and clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.

We rely and expect to continue to rely on third parties, such as engineering firms, CROs, clinical data management organizations, medical institutions, and clinical investigators, to conduct and manage our molecular testing and therapeutic product candidate design, preclinical testing, and clinical trials. Our reliance on these third parties for research and development activities reduces our control over these activities but does not relieve us of our responsibilities. For example, we remain responsible for ensuring that each of our clinical trials is conducted in accordance with GCP requirements, the general investigational plan, and the protocols established for such trials.

These third parties may be slow to recruit patients and complete the studies. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their contractual duties, do not meet expected deadlines, experience work stoppages, terminate their agreements with us or need to be replaced, or do not conduct our clinical trials in accordance with regulatory requirements or our stated protocols, we may need to enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed, or terminated or may need to be repeated. If any of the foregoing occur, we may not be able to obtain, or may be delayed in obtaining, marketing authorizations for our product candidates and may not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.

If our laboratory facilities become inoperable, we will be unable to perform our tests and our business will be harmed.

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Our laboratory or other facilities may be harmed or rendered inoperable (or samples could be damaged or destroyed) by natural or manmade disasters, including earthquakes, flooding, power outages, disease outbreaks and contamination, which may render it difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog of tests that could develop if any of our laboratory or other facilities is inoperable for even a short period of time may result in the loss of customers or harm to our reputation, and we may be unable to regain those customers in the future.

Our tests may not perform as expected and may result in reduced confidence in our products or legal claims.

Our success depends on the market’s confidence that we can provide timely, reliable, high-quality test results. There is no guarantee that the accuracy and reproducibility we have demonstrated to date will continue as our business grows. We believe that our customers (healthcare providers and their patients) are likely to be particularly sensitive to test limitations and errors, including inaccurate test results and the need on occasion to perform redraws on patients. As a result, if our tests do not perform as expected, our business, operating results, financial condition, and reputation will suffer. In addition, we may be subject to legal claims arising from such limitations, errors, or inaccuracies.

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

Even if our newly developed product candidates receive marketing authorizations, to the extent required, they may fail to achieve market acceptance.

If we can develop enhanced, improved, or new product candidates that receive marketing authorizations, they may nonetheless fail to gain sufficient market acceptance by healthcare providers, patients, third-party payors, and others in the medical community to be commercially successful. The degree of market acceptance of any of our new product candidates following receipt of marketing authorizations, if any, will depend on a number of factors, including:

 

our ability to anticipate and meet customer and patient needs;

 

the timing of regulatory approvals or clearances, to the extent such are required for marketing;

 

the efficacy, safety and other potential advantages, such as convenience and ease of administration, of our product candidates as compared to alternative tests or treatments;

 

the clinical indications for which our product candidates are approved or cleared, or in the case of our LDTs, validated;

 

concordance with clinical guidelines established by relevant professional colleges;

 

compliance with state guidelines and licensure, if applicable;

 

our ability to offer our product candidates for sale at competitive prices;

 

the willingness of the target patient population to try our new products, and of physicians to prescribe these products;

 

the strength of our marketing and distribution support;

 

the availability and requirements of third-party payor insurance coverage and adequate reimbursement for our product candidates;

 

the prevalence and severity of side effects and the overall safety profiles of our product candidates;

 

any restrictions on the use of our product candidates together with other products and medications;

 

our ability to manufacture quality products in an economic and timely manner;

 

interactions of our product candidates with other medications patients are taking; and

 

for ingestible product candidates, the ability of patients to take and tolerate our product candidates.

If our newly developed product candidates are unable to achieve market acceptance, our business, operating results, and financial condition will be harmed.

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Additional time may be required to obtain marketing authorizations for certain of our precision medicine product candidates because they are combination products.

Some of our precision medicine product candidates are drug/device combination products that require coordination within the FDA and similar foreign regulatory agencies for review of their device and drug components. Although the FDA and similar foreign regulatory agencies have systems in place for the review and approval of combination products such as ours, we may experience delays in the development and commercialization of our product candidates due to regulatory timing constraints and uncertainties in the product development and approval process.

Our precision medicine product candidates under development include complex medical devices that, if authorized for marketing, will require training for qualified personnel and care for data analysis.

Our precision medicine product candidates under development include complex medical devices that, if authorized for marketing, will require training for qualified personnel, including physicians, and care for data analysis. Although we will be required to ensure that our precision medicine product candidates are prescribed only by trained professionals, the potential for misuse of our precision medicine product candidates, if authorized for marketing, still exists due to their complexity. Such misuse could result in adverse medical consequences for patients that could damage our reputation, subject us to costly product liability litigation, and otherwise have a material and adverse effect on our business, operating results, and financial condition.

The successful discovery, development, manufacturing, and sale of biologics is a long, expensive, and uncertain process and carries unique risks and uncertainties. Moreover, even if successful, our biologic products may be subject to competition from biosimilars.

We may develop product candidates regulated as biologics in the future in connection with our precision medicine platform. The successful development, manufacturing, and sale of biologics is a long, expensive, and uncertain process. There are unique risks and uncertainties with biologics. For example, access to and supply of necessary biological materials, such as cell lines, may be limited and governmental regulations restrict access to and regulate the transport and use of such materials. In addition, the testing, development, approval, manufacturing, distribution, and sale of biologics is subject to applicable provisions of the FD&C Act, PHSA, and regulations issued thereunder that are often more complex and extensive than the regulations applicable to other pharmaceutical products, to medical devices, or to the LDTs we currently commercialize. Manufacturing biologics, especially in large quantities, is often complicated and may require the use of innovative technologies. Such manufacturing also requires facilities specifically designed and validated for this purpose and sophisticated quality assurance and quality control procedures. Biologics are also frequently costly to manufacture because production inputs are derived from living animal or plant material, and some biologics cannot be made synthetically.

Failure to successfully discover, develop, manufacture, and sell biologics could adversely impact our business, operating results, and financial condition.

Even if we are able to successfully develop biologics in the future, the Biologics Price Competition and Innovation Act, or BPCIA, created a framework for the approval of biosimilars in the United States that could allow competitors to reference data from any future biologic products for which we receive marketing approvals and otherwise increase the risk that any product candidates for which we intend to seek approval as biologic products may face competition sooner than anticipated. Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the original biologic was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full Biologics License Application, or BLA, for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity, and potency of their product. The BPCIA is complex and is still being interpreted and implemented by the FDA. As a result, the law’s ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement the BPCIA may be fully adopted by the FDA, any such processes could have a material adverse effect on the future commercial prospects for our biological product candidates.

In addition, there is a risk that any of our product candidates regulated as a biologic and licensed under a BLA would not qualify for the 12-year period of exclusivity or that this exclusivity could be shortened due to congressional action or otherwise, potentially creating the opportunity for generic competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have been the subject of litigation. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

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In Europe, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar approvals issued over the past few years. In addition, companies are developing biosimilars in other countries that could compete with any biologic products that we develop. If competitors are able to obtain marketing approval for biosimilars referencing any biologic products that we develop, our products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences. Expiration or successful challenge of our applicable patent rights could also trigger competition from other products, assuming any relevant exclusivity period has expired. As a result, we could face more litigation and administrative proceedings with respect to the validity and/or scope of patents relating to our biologic products.

If our future pharmaceutical product candidates are not approved by regulatory authorities, including the FDA, we will be unable to commercialize them.

In the future, we may develop pharmaceutical product candidates using our precision medicine platform that require FDA approval of a New Drug Application, or NDA, or a BLA before marketing or sale in the United States. In the NDA or BLA process, we, or our collaborative partners, must provide the FDA and similar foreign regulatory authorities with data from preclinical and clinical studies that demonstrate that our product candidates are safe and effective, or in the case of biologics, safe, pure, and potent, for a defined indication before they can be approved for commercial distribution. The FDA or foreign regulatory authorities may disagree with our clinical trial designs and our interpretation of data from preclinical studies and clinical trials. The processes by which regulatory approvals are obtained from the FDA and foreign regulatory authorities to market and sell a new product are complex, require a number of years, depend upon the type, complexity, and novelty of the product candidate, and involve the expenditure of substantial resources for research, development, and testing. The FDA and foreign regulatory authorities have substantial discretion in the drug approval process and may require us to conduct additional nonclinical and clinical testing or to perform post-marketing studies. Further, the implementation of new laws and regulations, and revisions to FDA clinical trial design guidance, may lead to increased uncertainty regarding the approvability of new drugs.

Applications for our drug or biologic product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:

 

the FDA or comparable foreign regulatory authorities may disagree with the design, implementation or results of our or our collaborators’ clinical trials;

 

the FDA or comparable foreign regulatory authorities may determine that our product candidates are not safe and effective, only moderately effective or have undesirable or unintended side effects, toxicities or other characteristics;

 

the population studied in the clinical program may not be sufficiently broad or representative to assure efficacy and safety in the full population for which we seek approval;

 

we or our collaborators may be unable to demonstrate to the FDA, or comparable foreign regulatory authorities that a product candidate’s clinical and other benefits outweigh its safety risks;

 

the FDA or comparable foreign regulatory authorities may disagree with our or our collaborators’ interpretation of data from preclinical studies or clinical trials;

 

the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a BLA, NDA, or other submission or to obtain regulatory approval in the United States or elsewhere;

 

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes, test procedures and specifications, or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and

 

the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our or our collaborators’ clinical data insufficient for approval.

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This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in our failing to obtain regulatory approval to market any of our product candidates, which would seriously harm our business. In addition, the FDA may recommend advisory committee meetings for certain new molecular entities, and if warranted, require a Risk Evaluation and Mitigation Strategy, or REMS, to assure that a drug’s benefits outweigh its risks. Even if we receive regulatory approval of a product, the approval may limit the indicated uses for which the drug may be marketed or impose significant restrictions or limitations on the use and/or distribution of such product.

In addition, in order to market any pharmaceutical or biological product candidates that we develop in foreign jurisdictions, we, or our collaborative partners, must obtain separate regulatory approvals in each country. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. Conversely, failure to obtain approval in one or more jurisdictions may make approval in other jurisdictions more difficult. These laws, regulations, additional requirements and changes in interpretation could cause non-approval or further delays in the FDA’s or other regulatory authorities’ review and approval of our and our collaborative partner’s product candidates, which would materially harm our business and financial condition and could cause the price of our securities to fall.

The marketing authorization process is expensive, time-consuming, and uncertain, and we may not be able to obtain or maintain authorizations for the commercialization of some or all of our product candidates.

The product candidates associated with our precision medicine platform and the activities associated with their development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale, and distribution, export, and import, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by the European Medicines Agency and comparable regulatory authorities in other countries. We have not received authorization to market any of our product candidates from regulatory authorities in any jurisdiction. Failure to obtain marketing authorization for a product candidate will prevent us from commercializing the product candidate.

Securing marketing authorizations may require the submission of extensive preclinical and clinical data and other supporting information to the various regulatory authorities for each therapeutic indication to establish the product candidate’s safety and efficacy, or in the case of product candidates regulated as biologics, such product candidate’s safety, purity, and potency. Securing regulatory authorization generally requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Our product candidates may not be effective, may be only moderately effective, or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining marketing authorization or prevent or limit commercial use.

The process of obtaining marketing authorizations, both in the United States and abroad, is expensive, may take many years if additional clinical trials are required, if authorization is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity, and novelty of the product candidates involved. Changes in marketing authorization policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application we submit, or may decide that our data is insufficient for approval and require additional preclinical, clinical, or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit, or prevent marketing authorization of a product candidate. Any marketing authorization we or our collaborators ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved medicine not commercially viable.

Accordingly, if we or our collaborators experience delays in obtaining authorization or if we or they fail to obtain authorization of our product candidates, the commercial prospects for our product candidates may be harmed and our ability to generate revenue will be materially impaired.

Our products or product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory authorization, limit the commercial profile of an approved label or result in significant negative consequences following marketing approval, if granted.

The use of our current products and precision medicine product candidates could be associated with side effects or adverse events, which can vary in severity (from minor reactions to death) and frequency (infrequent or prevalent). Side effects or adverse events associated with the use of our product candidates may be observed at any time, including in clinical trials or when a product is commercialized. Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory authorization by the FDA or other comparable foreign authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects such

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as toxicity or other safety issues and could require us or our collaboration partners to perform additional studies or halt development or sale of these product candidates or expose us to product liability lawsuits, which would harm our business and financial results. In such an event, we may be required by regulatory agencies to conduct additional animal or human studies regarding the safety and efficacy of our product candidates, which we have not planned or anticipated or our studies could be suspended or terminated, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny or withdraw approval of our product candidates for any or all targeted indications. There can be no assurance that we will resolve any issues related to any product-related adverse events to the satisfaction of the FDA or any other regulatory agency in a timely manner, if ever, which could harm our business, operating results, financial condition and prospects.

Additionally, product quality characteristics have been shown to be sensitive to changes in process conditions, manufacturing techniques, equipment or sites and other such related considerations, hence any manufacturing process changes we implement prior to or after regulatory authorization could impact product safety and efficacy.

Product-related side effects could affect patient recruitment for clinical trials, the ability of enrolled patients to complete our studies or result in potential product liability claims. We currently carry product liability insurance and we are required to maintain product liability insurance pursuant to certain of our license agreements. We believe our product liability insurance coverage is sufficient in light of our current clinical programs; however, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability, or such insurance coverage may not be sufficient to cover all losses. A successful product liability claim or series of claims brought against us could adversely affect our business, operating results, and financial condition. In addition, regardless of merit or eventual outcome, product liability claims may result in impairment of our business reputation, withdrawal of clinical study participants, costs due to related litigation, distraction of management’s attention from our primary business, initiation of investigations by regulators, substantial monetary awards to patients or other claimants, the inability to commercialize our product candidates and decreased demand for our product candidates, if authorized for commercial sale. Additionally, if one or more of our product candidates receives marketing authorization, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including but not limited to:

 

regulatory authorities may suspend, limit or withdraw marketing authorizations for such products, or seek an injunction against their manufacture or distribution;

 

regulatory authorities may require additional warnings on the label including “boxed” warnings, or issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings or other safety information about the product;

 

we may be required to change the way the product is administered or conduct additional clinical trials or post-approval studies;

 

we may be required to create a REMS plan, which could include a medication guide outlining the risks of such side effects for distribution to patients, a communication plan for healthcare providers and/or other elements to assure safe use;

 

the product may become less competitive;

 

we may be subject to fines, injunctions or the imposition of criminal penalties;

 

we could be sued and held liable for harm caused to patients; and

 

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of a particular product candidate, if approved, and could significantly harm our business, operating results, financial condition, and prospects.

If we receive marketing authorization, regulatory agencies including the FDA and foreign authorities enforce requirements that we report certain information about adverse medical events. For example, under FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of our device (or any similar future product) were to recur. We may fail to appreciate 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 our products. If we fail to investigate and report these events to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, including any legal action taken against us, will require us to devote significant time and capital to the matter, distract management from operating our business, and may harm our reputation and financial results.

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Our products, including our precision medicine product candidates under development, if authorized for marketing, may be subject to product recalls.

The FDA and similar foreign governmental authorities have the authority to require the recall of certain commercialized products over which they exercise oversight in the event of material deficiencies or defects in design or manufacture or a public health/safety issue. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture or a public health/safety issue. Manufacturers may, under their own initiative, recall a product if any material deficiency is found. The FDA requires that certain recalls of medical devices be reported to the FDA within 10 working days after the recall is initiated. We may initiate voluntary recalls involving our products in the future that we determine do not require us to notify the FDA. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. In addition, the FDA could bring an enforcement action against us based on our failure to report the recalls when they were conducted. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Once marketed, recalls of any of our products, including our precision medicine products, would divert managerial and financial resources and could have a material and adverse effect on our business, operating results, and financial condition. A future recall announcement could harm our reputation with customers and negatively affect our sales.

Our relationship with Avero Diagnostics may be challenged, and a successful challenge could adversely affect our operating structure.

We provide anatomic and molecular pathology testing through our affiliation with Mattison Pathology, LLP, a Texas limited liability partnership doing business as Avero Diagnostics, located in Lubbock and Irving, Texas. The laws of certain states in which we operate or may operate in the future prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although we believe that we have structured our affiliation with Avero Diagnostics to ensure that the physicians maintain exclusive authority regarding the delivery of medical care, there can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material and adverse effect on our business, operating results, and financial condition. Regulatory authorities and other parties, including our associated physicians, may assert that, despite the management service agreement and other arrangements through which we operate, we are engaged in the prohibited corporate practice of medicine, and/or that our arrangement with Avero Diagnostics constitutes unlawful fee-splitting. If a corporate practice of medicine or fee-splitting law is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate our relationship with Avero Diagnostics to bring its activities into compliance with such law. A determination of noncompliance, the termination of or failure to successfully restructure this relationship could result in disciplinary action, penalties, damages, fines, and/or a loss of revenue, any of which could have a material and adverse effect on our business, operating results, and financial condition. For more information regarding our relationship with Avero Diagnostics, see Part I, Item 1. “Business—Government Regulation—Avero Diagnostics Relationship and the Corporate Practice of Medicine.”

Defects or failures associated with our products could lead to recalls or safety alerts and negative publicity.

Manufacturing flaws, component failures, design defects, off-label uses, or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to, our commercialized products, and result in significant costs and negative publicity. A material adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand, and could harm our reputation and our ability to market our products in the future. In some circumstances, material adverse events arising from or associated with the design, manufacture or marketing of our products could result in among other things, labeling changes reflecting the updated safety information, regulatory requirements to issue communications to prescribers and/or conduct additional studies, or the suspension or delay of regulatory reviews of our applications for new marketing authorizations. We also may undertake a voluntary recall of products, or temporarily shut down production lines based on performance relative to our own internal safety and quality monitoring and testing data. Any of these problems could disrupt our business and have a material and adverse effect on our business, operating results, and financial condition.

We may not comply with laws regulating the protection of the environment and health and human safety.

Our research and development involves, or may in the future involve, the use of hazardous materials and chemicals and certain radioactive materials and related equipment. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Insurance may not provide adequate coverage against potential liabilities, and we do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us. Additional federal, state, and local laws and regulations affecting our operations may be

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adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

Our failure to comply with radio frequency regulations could impair our ability to commercially distribute and market our precision medicine product candidates in the applicable country or region.

Our PIL Dx precision medicine product candidate under development includes a wireless radio frequency transmitter and receiver, and is therefore subject to equipment authorization requirements in the United States and elsewhere. In the United States and certain other countries, authorities often require advance clearance of radio frequency devices before they can be sold or marketed in these jurisdictions, subject to limited exceptions. Modifications to our precision medicine product candidate’s design and specifications may require new or further marketing authorizations before we are permitted to market and sell modified precision medicine products. If we are unable to obtain any required marketing authorizations from the authorities responsible for the radio frequency regulations, the sale or use of our precision medicine product candidate could be prevented in such countries. Any such action could negatively affect our business, operating results, and financial condition.

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

The marketing, sale and use of our products could lead to product liability claims against us if someone were to allege that our test or other product failed to perform as it was designed, or caused harm to an individual, or if someone were to misinterpret test results. We may be subject to liability for errors in, a misunderstanding of, or inappropriate reliance upon, the information we provide as part of the results generated by our tests. For example, Innatal could provide a low-risk result for a chromosomal abnormality upon which a patient or physician may rely to make a conclusion about the health of the fetus, which may, in fact, have the condition because the Innatal result was a false negative. As another example, Preparent could provide a low-risk result regarding the carrier status of a disorder of an expectant parent upon which a patient or physician may rely to make a conclusion about the health of the fetus, which may, in fact, have the condition because the Preparent result was a false negative. If the resulting baby is born with the condition, the family may file a lawsuit against us claiming product liability or professional liability.

In addition, we may be subject to product liability claims and lawsuits, including potential class actions, alleging that our products have resulted in or could result in an unsafe condition or injury. The product candidates we are developing using our precision medicine platform are designed to be ingested, and there are a number of factors that could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products that we sell. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend. Although we maintain product and professional liability insurance, our insurance may not fully protect us from the financial impact of defending against product liability or professional liability claims or any judgments, fines or settlement costs arising out of any such claims. Any product liability or professional liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability or professional liability lawsuit could harm our reputation, result in a cessation of our testing, or cause our partners to terminate existing agreements and potential partners to seek other partners, any of which could adversely impact our business, operating results, and financial condition.

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

Our operating results, including our revenues, gross margin, profitability, and cash flows, have varied in the past and may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, our results should not be relied upon as an indication of future performance. Our operating results, including quarterly financial results, may fluctuate as a result of a variety of factors, many of which are outside of our control. Fluctuations in our results may adversely impact the value of our common stock. Factors that may cause fluctuations in our financial results include, without limitation, those listed elsewhere in this “Risk Factors” section. In addition, our results may fluctuate due to the fact that we recognize costs as they are incurred, but there is typically a delay in the related revenue recognition as we record most revenue only upon receipt of payment.

Accordingly, to the extent our revenues increase, we may experience increased costs unless and until the related revenues are recognized. In addition, as we increase our internal sales and marketing and research and development efforts, we expect to incur costs in advance of achieving the anticipated benefits of such efforts. We also may face competitive pricing or reimbursement rate pressures, and we may not be able to maintain our sales volume and/or reimbursement rates in the future, which would adversely affect our business, operating results, and financial condition.

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

We have in the past entered into, and may in the future enter into, transactions to acquire other businesses, products, or

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technologies. Successful acquisitions require us to correctly identify appropriate acquisition candidates and to integrate acquired products or operations and personnel with our own.

Should we make an error in judgment when identifying an acquisition candidate, should the acquired operations not perform as anticipated, or should we fail to successfully integrate acquired technologies, operations, or personnel, we will likely fail to realize the benefits we intended to derive from the acquisition and may suffer other adverse consequences. Acquisitions involve a number of other risks, including:

 

we may not be able to make such acquisitions on favorable terms or at all;

 

the acquisitions may not strengthen our competitive position, and these transactions may be viewed negatively by customers or investors;

 

we may decide to incur debt with debt repayment obligations that we are unable to satisfy or that could otherwise require the use of a significant portion of our cash flow;

 

we may decide to issue our common stock or other equity securities to the stockholders of the acquired company, which would reduce the percentage ownership of our existing stockholders;

 

we may incur losses resulting from undiscovered liabilities of the acquired business that are not covered by any indemnification we may obtain from the seller;

 

the acquisitions may reduce our cash available for operations and other uses;

 

the acquisitions may divert of the attention of our management from operating our existing business; and

 

the acquisitions may result in charges to earnings in the event of any write-down or write-off of goodwill and other assets recorded in connection with acquisitions.

We cannot predict the number, timing or size of future acquisitions or the effect that any such transactions might have on our business, operating results, and financial condition.

The development and expansion of our business through joint ventures, licensing and other strategic transactions may result in similar risks that reduce the benefits we anticipate from these strategic alliances and cause us to suffer other adverse consequences.

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

DNA testing, such as testing that is conducted using Innatal, Preparent and our other products, has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, limit or regulate the use of genomic information or genomic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Patients may also refuse to use genetic tests even if permissible, for similar reasons; they may also refuse genetic testing due to concerns regarding eligibility for life or other insurance. Ethical and social concerns may also influence U.S. and foreign patent offices and courts with regard to patent protection for technology relevant to our business.

Although the Genetic Information Non-discrimination Act has criminalized the disallowance of health insurance on the basis of genetic information, modification or retraction of this federal law could dramatically reduce public demand for genetic testing. These and other ethical, legal and social issues may limit market acceptance of our tests or reduce the potential markets for products enabled by our technology platform, either of which could harm our business, operating results, and financial condition.

We may be significantly impacted by changes in tax laws and regulations or their interpretation.

U.S. and foreign governments continue to review, reform and modify tax laws. Changes in tax laws and regulations could result in material changes to the domestic and foreign taxes that we are required to provide for and pay. In addition, we are subject to regular audits with respect to our various tax returns and processes in the jurisdictions in which we operate. Errors or omissions in tax returns, process failures, or differences in interpretation of tax laws by tax authorities and us may lead to litigation, payments of additional taxes, penalties, and interest. On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or TCJA, was passed into law. The TCJA has given rise to significant one-time and ongoing changes, including but not limited to a federal corporate tax rate decrease to 21% for tax years beginning after December 31, 2017, limitations on interest expense deductions, the immediate expensing of certain capital expenditures, the adoption of elements of a partially territorial tax system, new anti-base erosion provisions, a reduction to the maximum deduction allowed for net operating losses generated in tax years after December 31, 2017 and providing for indefinite carryforwards for losses generated in tax years after December 31, 2017. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, and will be subject to interpretations and implementing regulations by the Treasury and Internal Revenue Service, any of which could mitigate or increase certain adverse effects of the legislation. In addition, it

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is unclear how these U.S. federal income tax changes will affect state and local taxation. Generally, future changes in applicable tax laws and regulations, or their interpretation and application, could have a material and adverse effect on our business, operating results, and financial condition.

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

As of December 31, 2020, we had net operating loss, or NOL, carryforwards of approximately $271.1 million for federal income tax purposes, and $200.0 million for state income tax purposes. The federal NOLs will be carried forward indefinitely and the state NOLs began expiring in 2019. Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. Some of these NOLs could expire unused and be unavailable to offset our future income tax liabilities. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change, by value, in its equity ownership by 5% stockholders over a rolling three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes to offset its post-change income may be limited. If we determine that an ownership change has occurred and our ability to use our historical NOLs is materially limited, it could harm our future operating results by effectively increasing our future tax obligations. In addition, under the TCJA, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely but generally may not be carried back and the deductibility of such NOLs is limited to 80% of taxable income. On March 27, 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, which provides some relief from the limitations on the utilization of NOLs and certain other tax attributes described above. During the three months ended March 31, 2020, we recorded a discrete tax benefit of $37.7 million related to the NOL carryback provisions available under the CARES Act for taxes paid in years 2013, 2014, 2015, and 2017, which we refer to as the CARES Act Tax Benefit. We agreed to pay 65% of any tax refund received in excess of $5.0 million in a single year, along with other civil settlements, damages awards, and tax refunds, to accelerate payments to the government in connection with our government settlement. During the year ended December 31, 2020, we received a tax refund of $37.7 million related to the NOL carryback provisions available under the CARES Act. As of December 31, 2020, we had paid a total of $37.0 million to the government in connection with our government settlements. See Part I, Item 3. “Legal Proceedings—Federal Investigations.”

Reimbursement Risks Related to Our Business

If third-party payors do not adequately reimburse for our products, they might not be purchased or used, which may adversely affect our revenue and profitability.

Our future revenues and profitability will depend heavily upon the availability of coverage and adequate reimbursement from governmental and other third-party payors, both in the United States and in foreign markets, for the use of our products, including any potential products such as a test for preeclampsia, precision medicine devices, and pharmaceutical products. Coverage and reimbursement by governmental and commercial third-party payors may depend upon a number of factors, including the determination that the product and its use or administration for a particular patient is:

 

a covered benefit;

 

safe, effective, and medically necessary;

 

appropriate for the specific patient;

 

supported by guidelines established by the relevant professional college;

 

approved in any states where specific assay approval is necessary;

 

cost-effective; and

 

neither experimental nor investigational.

Obtaining coverage and reimbursement approval for a product from each third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical, and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to satisfy third-party payors that the product should be covered and reimbursed. There is substantial uncertainty whether any particular payor will cover and reimburse the use of any product incorporating new technology. Even when a payor determines that a product is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved by the FDA or a comparable authority. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. In some instances, payment may only be obtained by engaging in lengthy and costly appeals processes. Reimbursement rates may vary according to the use of the product and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products, may reflect budgetary constraints

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and/or imperfections in Medicare, Medicaid or other data used to calculate these rates. Net prices for products may be reduced by mandatory discounts or rebates required by government healthcare programs or by any future relaxation of laws that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.

There have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products, which may affect payments for our products. Governmental and private entities that establish reimbursement policies, including the Centers for Medicare and Medicaid Services, or CMS, frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both CMS and other third-party payors may have sufficient market power to demand significant price reductions. Due in part to actions by third-party payors, the healthcare industry is experiencing a trend toward containing or reducing costs through various means, including lowering reimbursement rates, limiting therapeutic class coverage, and negotiating reduced payment schedules with service providers for certain products.

Our inability to promptly obtain coverage and profitable reimbursement rates from third-party payors for our products could have a material and adverse effect on our business, operating results, and financial condition.

We may be unable to expand or maintain third-party payor coverage and reimbursement for our Innatal, Preparent, and other tests or other products.

Our business depends on our ability to obtain or maintain adequate reimbursement coverage from third-party payors. Third-party reimbursement for our testing represents a significant portion of our revenues, and we expect third-party payors such as third-party commercial payors and government healthcare programs to continue to be our most significant sources of payments in the foreseeable future. In particular, we believe that for us to achieve commercial success it will be necessary to gain acceptance from third-party payors for the screening of microdeletions and for use of NIPT in the average-risk pregnancy population, which population represents roughly 80% of the U.S. pregnancy market, and to obtain positive coverage determinations and favorable reimbursement rates from third-party payors for our tests. We did not receive reimbursement for a significant number of Innatal tests for average-risk patients that we performed in the year ended December 31, 2020. In addition, it is to be determined whether and to what extent certain of our other products, including those under development, will be covered or reimbursed. If we are unable to obtain or maintain coverage or adequate reimbursement from, or achieve in-network status with, third-party payors for our existing or future tests or other products, our ability to generate revenues will be limited. For example, healthcare providers may be reluctant to order our tests or other products due to the potential of a substantial cost to the patient if coverage or reimbursement is unavailable or insufficient.

Leading professional societies may recommend alternatives to our tests in average-risk patient populations, which may provide a basis for third-party payors not to cover or reimburse our tests in those populations.

In making coverage determinations, third-party payors often rely on practice guidelines issued by professional societies. ACOG has issued updated guidelines recommending informing pregnant women that Non-Invasive Prenatal Screening, or NIPS, is the most sensitive screening option for trisomy 13, trisomy 18, and Down syndrome, as well as of the availability of the expanded use of NIPT to screen for clinically relevant copy number variants, or CNVs, in the context of counseling that includes the risks/benefits and limitations of screening for CNVs. A CNV is a genetic mutation in which a segment of the genome has been deleted or duplicated, including microdeletions in which a small segment of a chromosome is deleted. The International Society for Prenatal Diagnosis has issued guidelines that are supportive of performing NIPT in average-risk pregnancies, as well as high-risk pregnancies. ACOG and the American College of Medical Genetics, or ACMG, have also provided support for the use of NIPT in the general population, with ACOG noting, however, that NIPT is not equivalent to diagnostic testing because of its potential for false-positive and false-negative results. However, the Society for Maternal Fetal Medicine, or SMFM, has issued guidelines for NIPT stating that, while all pregnant women should be informed of the option to receive NIPT, conventional screening methods, such as traditional serum screening, rather than NIPT, remain the most appropriate choice for first-line screening for average-risk pregnancies. Therefore, while we expect the ACOG and SMFM guidelines to result in an increase in the number of average-risk women who are informed of NIPT and that may request it as a result, not all third-party payors reimburse for NIPT for these average-risk patients.

In December 2020, Aetna finalized its reimbursement policy to cover NIPT in the average-risk population. UnitedHealthcare and a number of other third-party payors have also made a similar change to cover NIPT in the average-risk population. This leaves only some regional plans and some Medicaid plans with negative coverage determinations for NIPT in average-risk patient populations, meaning that their policy is not to reimburse for NIPT for patients in the average-risk or general population. The SMFM guidelines also echoed a previous statement from SMFM that routine screening for microdeletions should not be performed. Many third-party payors do not cover microdeletions screening. We have experienced, and may continue to experience, a negative impact on third-party payors’ coverage for Innatal for microdeletions, at least until additional validation data on the sensitivity and specificity of our tests becomes available. We may not be able to obtain positive coverage determinations for our tests. If third-party payors do not reimburse for NIPT for average-risk pregnancies or microdeletions in the future, our operating results would be adversely affected, particularly to the extent that we continue to perform large volumes of

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tests for which third-party payors do not cover.

New reimbursement methodologies applicable to our tests, including new CPT codes, may decrease reimbursement rates from third-party payors.

In the United States, the American Medical Association, or AMA, generally assigns specific billing codes for laboratory tests under a coding system known as Current Procedure Terminology, or CPT, which we and our ordering healthcare providers must use to bill and receive reimbursement for our tests. Once the CPT code is established, CMS establishes payment levels and coverage rules under Medicare while private payors independently establish rates and coverage rules. A CPT code specific to NIPT for aneuploidies was implemented, effective January 1, 2015, and a CPT code for microdeletions was implemented, effective January 1, 2017. CMS has established a pricing benchmark of $802 for aneuploidy and microdeletions testing. However, our microdeletions reimbursement has decreased under this new code because third-party payors are declining to reimburse under this new code or reimbursing at a much lower rate than we had previously received. Furthermore, we cannot guarantee that we will be able to negotiate favorable rates for this code or receive reimbursement at all if we are unable to collect and publish additional data and obtain positive coverage determinations for Innatal for microdeletions. In addition, effective January 1, 2019, the AMA approved the use of a CPT code for expanded carrier screening tests, which may similarly cause reimbursement for our Preparent expanded carrier screening tests to decline. We do not currently have assay-specific CPT codes assigned for all of our tests, and there is a risk that we may not be able to obtain such codes or, if obtained, we may not be able to negotiate favorable rates for such codes.

We currently submit for reimbursement using CPT codes based on the guidance of outside coding experts and legal counsel. There is a risk that the codes we currently submit may be rejected or withdrawn, including as a result of a change in the applicable code due to the use of a new technology for our tests, or that third-party payors will seek refunds of amounts that they claim were inappropriately billed based on either the CPT code used, or the number of units billed. In addition, third-party payors may not establish positive coverage policies for our tests or adequately reimburse for any CPT code we may use, or may seek recoupment for testing previously performed, which have occurred in the past.

Billing disputes with third-party payors may decrease realized revenue and may lead to requests for recoupment of past amounts paid.

Payors dispute our billing or coding from time to time and we deal with requests for recoupment from third-party payors from time to time in the ordinary course of our business, and we expect these disputes and requests for recoupment to continue. Third-party payors may decide to deny payment or recoup payment for testing that they contend to have been not medically necessary, against their coverage determinations, or for which they have otherwise overpaid, and we may be required to refund reimbursements already received. We have entered into settlement agreements with government and commercial payors in order to settle claims related to past billing practices that have since been discontinued. For more information on these disputes, see Part I, Item 1. “Business—Reimbursement—Commercial Third-Party Payors.” Additionally, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010, or collectively, the ACA, enacted in March 2010, requires 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 and the OIG’s healthcare enforcement authorities, and would be a potential violation of our obligations under our Corporate Integrity Agreement to report substantial overpayments to the OIG. Claims for recoupment also require the time and attention of our management and other key personnel, which can be a distraction from operating our business.

If third-party payors deny payment for testing, reimbursement revenue for our testing could decline. If a third-party payor successfully challenges that payment to us for prior testing was in breach of contract or otherwise contrary to policy or law, they may recoup payment, which amounts could be significant and would impact our operating results and financial condition, and it may decrease reimbursement going forward. We may also decide to negotiate and settle with a third-party payor in order to resolve an allegation of overpayment. In the past, we have negotiated and settled these types of claims with third-party payors. We may be required to resolve further disputes in the future. For example, on November 16, 2020, we received a letter from Anthem informing us that Anthem is seeking recoupment for historical payments made by Anthem in an aggregate amount of approximately $27.4 million. The historical payments for which Anthem is seeking recoupment are claimed to relate primarily to discontinued legacy billing practices for our NIPT and microdeletion tests and secondarily to the implementation of the new CPT code for reimbursement for our Preparent expanded carrier screening tests. We can provide no assurance that we will not receive similar claims for recoupment from other third-party payors in the future. For more information on this claim, see Part I, Item 1. “Business—Reimbursement—Payor Dispute.” Any of these outcomes, including recoupment or reimbursements, might also require us to restate our financials from a prior period, any of which could have a material and adverse effect on our business, operating results, and financial condition.

“Most favored nation” provisions in contracts with third-party payors may limit potential for revenue growth and may lead to claims for recoupment.

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Some of our contracts with third-party payors contain “most favored nation” provisions, pursuant to which we have agreed that we will not bill the third-party payor more than we bill any other third-party payor. These contract provisions limit the amount we are able to charge for our products. These most favored nation provisions may require us to forego revenues from some third-party payors or reduce the amount we bill to each third-party payor with a most favored nation clause in its contract, which could have a material and adverse effect on our business, operating results, and financial condition. We monitor our billing and claims submissions for compliance with these contractual requirements with third-party payors. If we do not successfully manage compliance with these provisions, this could also subject us to claims for recoupment, which could result in an obligation to repay amounts previously earned.

When third-party payors deny coverage, we are often unable to collect from the patient or any other source and risk disputes if we attempt to do so.

If a third-party payor denies coverage, or if the patient has a large deductible or co-insurance amount, it may be difficult for us to collect from the patient, and we may not be successful in doing so. If we are in-network, we are often contractually prohibited from seeking payment from the patient. If we are out-of-network, we are often unable to collect the full amount of a patient’s responsibility, despite our good faith efforts to collect. As a result, we cannot always collect the full amount due for our tests when third-party payors deny coverage, cover only a portion of the invoiced amount or the patient has a large deductible, which may cause payors to raise questions regarding our billing policies and patient collection practices. We have in the past received, and we may in the future receive, inquiries from third-party payors regarding our billing policies and collection practices in these circumstances. Guidance from third-party payors regarding billing and patient collection practices will continue to evolve and may also impact our compliance with applicable requirements. While we have addressed these inquiries as and when they have arisen, there is no guarantee that we will be successful in addressing such concerns, and if we are unsuccessful, this may result in a third-party payor deciding to reimburse for our tests at a lower rate or not at all, seeking recoupment of amounts previously paid to us, or bringing legal action to seek reimbursement of previous amounts paid. Any of such occurrences could cause reimbursement revenue for our testing, which constitutes the large majority of our revenue, to decline. Additionally, if we were required to make a repayment, such repayment could be significant, which could have a material and adverse effect on our business, operating results, and financial condition.

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

We are in-network, or under contract, with some of the third-party payors from whom we receive reimbursement; this means that we have agreements with such third-party payors that govern approval or payment terms. However, these contracts do not guarantee reimbursement for all testing we perform. For example, many third-party payors with whom we have written agreements have policies that state they will not reimburse for use of NIPT for average-risk pregnancies or for the screening of microdeletions, or do not have a policy in place to reimburse for microdeletions screening. In addition, the terms of certain of our agreements require a physician or qualified practitioner’s signature on test requisitions or require other controls and procedures prior to conducting a test. In particular, third-party payors have been increasingly requiring prior authorization to be obtained prior to conducting a test as a condition to reimbursing for the test. This has placed a burden on our billing operations as we have to dedicate resources to monitor that these prior authorization requirements are met and to conduct follow-up and address issues as they arise, and has also impacted our operating results, including our gross margins, since these requirements began to take effect in 2017. To the extent we or the healthcare providers ordering our tests do not follow the prior authorization requirements, we may be subject to claims for recoupment of reimbursement amounts previously paid to us, or may not receive some or all of the reimbursement payments to which we would otherwise be entitled. This has occurred in some cases in the past and may occur in the future, which could have a material and adverse effect on our business, operating results, and financial condition.

We have experienced, and may continue to experience, delays in reimbursement when we transition to being an in-network provider with a third-party payor. In addition, while we expect to gradually see an increase in test volume through broader access to in-network patients and an increase in percentage of tests paid upon transitioning to in-network status with a payor, we also expect to experience a negative impact in revenues per test due to lower rates. We can provide no assurance that we will see the benefits of this transition to in-network status and that the increase in volume of tests and tests paid will be sufficient to compensate for the decrease in per test revenues.

Where we are considered to be an out-of-network provider, which is the case with some larger third-party payors from whom we currently receive reimbursement, such third-party payors could withdraw coverage and decline to reimburse for our tests in the future, for any reason. They can also impose prior authorization requirements through the terms of the patients’ health plans. Managing reimbursement on a case-by-case basis is time-consuming and contributes to an increase in the number of days it takes us to collect on accounts, which also increases our risk of non-payment. Negotiating reimbursement on a case-by-case basis also typically results in the receipt of reimbursement at a significant discount to the list price of our tests.

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Even if we are being reimbursed for our tests, third-party payors may unilaterally review and adjust the rate of reimbursement, require co-payments from patients or stop paying for our tests. Government healthcare programs and other third-party payors continue to increase their efforts to control the cost, utilization, and delivery of healthcare services by demanding price discounts or rebates and limiting coverage of, and amounts they will pay for, molecular tests. These measures have resulted in reduced payment rates and, in some instances, decreased utilization in the clinical laboratory industry. Because of these cost-containment measures, governmental and commercial third-party payors—including those that currently reimburse our tests—may reduce, suspend, revoke or discontinue payments or coverage at any time.

Reduced reimbursement of our tests may harm our business, operating results, and financial condition. Billing for clinical laboratory testing services is complex. We perform tests in advance of payment and without certainty as to the outcome of the billing process. In cases where we expect to receive a fixed fee per test due to our reimbursement arrangements, we may nevertheless encounter variable reimbursement, leading to disputes over pricing and billing. Each third-party payor typically has different billing requirements, and the billing requirements of many payors have become increasingly difficult to meet. Among the factors complicating our billing of third-party payors are:

 

disparity in coverage among various payors;

 

disparity in information and billing requirements among payors, including with respect to prior authorization requirements and procedures and establishing medical necessity; and

 

incorrect or missing billing information, which is required to be provided by the ordering healthcare provider.

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

Our status as an out-of-network provider with large commercial third-party payors may cause healthcare providers to avoid recommending our tests.

We are considered to be an out-of-network provider with respect to some larger commercial third-party payors from whom we currently receive reimbursement. Physician groups and other healthcare providers may view this negatively and may insist upon only using clinical laboratories that are in-network with their patients’ insurance companies. These types of decisions could reduce our revenue, and harm our financial condition.

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

The U.S. government has shown significant interest in pursuing healthcare reform and reducing healthcare costs. Government healthcare policy has been and will likely continue to be a topic of extensive legislative and executive activity in the U.S. federal government and many U.S. state governments. As a result, our business could be affected by significant and potentially unanticipated changes in government healthcare policy, such as changes in reimbursement levels by government third-party payors. Any such changes could substantially impact our revenues, increase costs, and divert management attention from our business strategy. We cannot predict the impact of governmental healthcare policy changes on our future business, operating results, and financial condition. In the United States, the ACA was signed into law in March 2010 and significantly impacted the U.S. pharmaceutical and medical device industries, including the diagnostics sector, in a number of ways. Among other things, the ACA expanded healthcare fraud and abuse laws such as the False Claims Act and the Anti-Kickback Statute, including but not limited to required disclosures of financial arrangements with physician customers, required reporting of discovered overpayments, lower thresholds for violations, new government investigative powers, and enhanced penalties for such violations. The ACA restricts insurers from charging higher premiums or denying coverage to individuals with pre-existing conditions, and requires insurers to cover certain preventative services without charging any copayment or coinsurance, including screening for lung, breast, colorectal and cervical cancers. The ACA also created a new system of health insurance “exchanges” designed to make health insurance available to individuals and certain groups through state- or federally-administered marketplaces in addition to existing channels for obtaining health insurance coverage. In connection with such exchanges, certain “essential health benefits” are intended to be made more consistent across plans, setting a baseline coverage level. The states (and the federal government) have some discretion in determining the definition of “essential health benefits” and we do not know whether our tests or other products will fall into a benefit category deemed “essential” for coverage purposes across the plans offered in any or all of the exchanges. If any of ou