What changed in this filing

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Item 1A. Risk Factors

2023-11-02 compared with 2023-08-02 · 84 added, 48 removed, 131 unchanged (50% of the section changed)

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Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or future results.

There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2023 other than the updates to the risk factors or new risk factors set forth below.

There have been no material changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2022 and our Quarterly Report on Form 10-Q for the nine months ended September 30, 2023 other than the updates to the risk factors or new risk factors set forth below.

New risk factors that were not included in our Annual Report on Form 10-K for the year ended December 31, 2022 have been marked with an asterisk (*).

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In July 2023, the MAC suspended the LCD and then posted a new draft LCD for comment that is substantially the same as the LCD that was to become effective.

During the third quarter of 2023, we continued to monitor our market capitalization against the carrying value of our reporting unit and did not observe any significant changes since our impairment test at June 30, 2023.

We are currently performing our annual impairment test, as of October 1, 2023, and we have not identified any additional indicators of impairment to date.

Factors that could result in a future impairment of goodwill include declines in the price of our common stock, increased competition, changes in macroeconomic developments, unfavorable government or regulatory developments and changes in coverage or reimbursement conditions.

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Variable consideration is evaluated each reporting period and adjustments are recorded as increases or decreases in revenues.

Variable consideration for Medicare claims that are not covered by Medicare, including those claims

undergoing appeal, is deemed to be fully constrained due to factors outside our influence (e.g., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

Variable consideration for Medicare claims that are not covered by Medicare, including those claims undergoing appeal, is deemed to be fully constrained due to factors outside our influence (e.g., judgment or actions of third parties) and the uncertainty of the amount to be received is not expected to be resolved for a long period of time.

For these fully constrained claims, we generally recognize revenue in the period the uncertainties are resolved, if favorable.

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If we are not successful in obtaining coverage from third-party payors, in reversing existing non-coverage policies, or if other third-party payors issue similar non-coverage policies, this could have a material adverse effect on our business and operations.

Palmetto issued a final LCD for DecisionDx-Melanoma, which became effective on December 3, 2018, and issued a final expanded LCD for DecisionDx-Melanoma, effective November 22, 2020.

Noridian has adopted the same coverage policy as Palmetto and also issued an expanded final LCD for DecisionDx-Melanoma, effective December 6, 2020.

More recently, Palmetto converted the DecisionDx-Melanoma test-specific LCD to a “foundational” LCD.

This LCD was issued as final May 19, 2022 with Noridian issuing the same on June 16, 2022.

The final LCDs did not result in any change in coverage.

Palmetto issued a final LCD for DecisionDx-UM effective July 10, 2017.

Noridian has adopted the same coverage policy as Palmetto for DecisionDx-UM.

We worked with Palmetto to obtain these positive coverage decisions through the submission of a detailed dossier of analytical and clinical data to substantiate that the tests meet Medicare’s medical necessity requirements.

Per their joint operating agreement, Noridian, the MAC responsible for administering claims for laboratory services performed in Arizona, adopts the same coverage policy as Palmetto.

Separately, we also have received Medicare coverage for our MyPath Melanoma, DecisionDx-SCC, TissueCypher and IDgenetix tests.

The process to obtain Medicare coverage is lengthy, time-consuming, has changed over time, may change in the future and requires significant dedication of resources, and as we develop or acquire new products, we may be unsuccessful in receiving Medicare coverage for those products or in maintaining our current Medicare coverage.

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Accordingly, current Medicare coverage of our tests or a history of coverage by Medicare is no guarantee of future Medicare coverage.

We have received positive coverage decisions and receive Medicare reimbursement for our DecisionDx-Melanoma, DecisionDx-UM, MyPath Melanoma tests, and IDgenetix.

Our DecisionDx-SCC and TissueCypher tests receive Medicare reimbursement as well.

If coverage for one or more of our products is withdrawn, our business could be adversely impacted.

On June 2, 2023, Novitas finalized the oncology biomarker LCD pursuant to which the DecisionDx-SCC test would no longer be covered by Medicare effective July 17, 2023.

However, on July 6, 2023, Novitas suspended the final version of the LCD and on July 27, 2023, Novitas posted a nearly identical draft LCD that also recommends non-coverage for our DecisionDx-SCC test.

The comment period for the proposed LCD ended on September 9, 2023.

On June 8, 2023, both Palmetto and Noridian posted their draft LCD recommending no coverage for DecisionDx-SCC.

The comment period for the draft LCDs ended on July 22, 2023.

We cannot predict whether these LCDs will be finalized as proposed or what the timing of any final LCD might be.

Under Medicare, payment for products like ours is generally made under the CLFS with payment amounts assigned to specific procedure billing codes.

Medicare reimbursement rates for our tests are subject to change and may decrease from those currently in effect.

For example, in February 2023, MolDX notified us that as part of its annual CPT code updates IDgenetix should shift billing to a different generic gene sequencing CPT code and continue using the IDgenetix Z-Code beginning in March 2023.

The New CPT Code is currently contractor priced at $917 while it undergoes CMS’s gapfill pricing process in 2023.

Accordingly, as a result of this change, the Medicare reimbursement rate for the IDgenetix multi-gene panel decreased from approximately $1,500 to $917 per test.

The New CPT Code does not describe all of the components of the IDgenetix test.

We subsequently obtained a test-specific PLA CPT code.

For example, in February 2023, MolDX notified us that IDgenetix should shift billing to a different generic gene sequencing CPT code and continue using the IDgenetix Z-Code beginning in March 2023.

As a result of this change, the Medicare reimbursement rate for the IDgenetix multi-gene panel decreased from approximately $1,500 to $917 per test.

The new PLA code becomes effective October 1, 2023 and is currently undergoing the 2024 CLFS pricing process.

In September 2023, CMS posted a preliminary CLFS determination which crosswalks our PLA CPT code to an existing PLA code at a rate of $1,336 per test.

The final 2024 CLFS rates will be posted in the fourth quarter of 2023.

In April 2014, Congress passed the Protecting Access to Medicare Act of 2014 (“PAMA”) which included substantial changes to the way in which clinical laboratory services are paid under Medicare.

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CMS uses this data to calculate a weighted median payment rate for each test, which will be used to establish revised Medicare CLFS reimbursement rates for the test.

Laboratories that fail to report the required payment

information may be subject to substantial civil monetary penalties.

Laboratories that fail to report the required payment information may be subject to substantial civil monetary penalties.

We bill Medicare for our products, and therefore we are subject to reporting requirements under PAMA.

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It is unclear what impact new pricing structures, such as those adopted under PAMA, may have on our business, financial condition, results of operations or cash flows.

In early 2021, we submitted our technical assessment dossier for DiffDx-Melanoma.

The dossier was accepted as complete in the first quarter of 2021.

In June 2022, Palmetto and Noridian each posted a proposed LCD that would convert the MyPath Melanoma test-specific LCD to a “foundational” LCD and provide coverage for both MyPath Melanoma and DiffDx-Melanoma.

On June 22, 2023, Palmetto and Noridian issued final foundational LCDs that will provide coverage for both MyPath Melanoma and DiffDx-Melanoma effective August 6, 2023.

In the second quarter of 2022, we obtained a PLA code for DiffDx-Melanoma.

DiffDx-Melanoma is going through CMS’s gapfill pricing process in 2023, which we expect to conclude in late 2023 and to be effective January 1, 2024.

The gapfill process consists of several steps throughout the calendar year.

First, individual MACs develop gapfill rates and report them to CMS.

Using this information, CMS then posts preliminary rates and commences a public comment period.

After evaluating public comments, CMS posts updated rates and begins accepting requests to reconsider these rates, known as reconsideration requests.

After CMS processes any reconsideration requests, the gapfill rates are considered final.

In April 2023, CMS posted a preliminary determination of a gapfill rate for DiffDx-Melanoma of $1,950 per test, which is subject to a public comment period and any reconsideration requests.

We cannot predict at this time what the final gapfill rate will be.

On June 2, 2023, Novitas finalized the oncology biomarker LCD pursuant to which the DecisionDx-SCC test would no longer be covered by Medicare effective July 17, 2023.

However, on July 6, 2023, Novitas suspended the final version of the LCD and announced its intent to post a new proposed LCD for comment and presentation at an open meeting.

On July 27, 2023, Novitas posted a nearly identical proposed oncology biomarker LCD that continues to intend to rely upon evidentiary reviews sourced from three databases:

ClinGen, OncoKB and NCCN.

The proposed LCD also recommends non-coverage for our DecisionDx-SCC test.

The comment period for the proposed LCD ends on September 9, 2023.

We cannot predict whether this LCD will be finalized as proposed or what the timing of any final LCD might be.

In the second quarter of 2020, we submitted our technical assessment dossier for DecisionDx-SCC to Palmetto and Noridian.

The dossier was accepted as complete in the third quarter of 2020.

On June 8, 2023, both Palmetto and Noridian posted their draft LCD recommending no coverage for DecisionDx-SCC.

The comment period for the draft LCDs ended on July 22, 2023.

federal government continues to show significant interest in pursuing healthcare reform and reducing healthcare costs.

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If we fail to establish and maintain broad adoption of, and coverage and reimbursement for, our products, our ability to generate revenue could be harmed and our future prospects and our business could suffer.

Our products are currently marketed as laboratory developed tests, and any changes in regulations or the U.S.

Food and Drug Administration’s (“FDA”) enforcement discretion for laboratory developed tests, or violations of regulations by us, could adversely affect our business, prospects, results of operations or financial condition.

The diagnostics industry is highly regulated, and we cannot assure you that the regulatory environment in which we operate will not change significantly and adversely in the future.

In many instances, there are no significant regulatory or judicial interpretations of these laws and regulations.

Although the FDA has statutory authority to assure that medical devices are safe and effective for their intended uses, the FDA has generally exercised its enforcement discretion and not enforced applicable regulations with respect to in vitro diagnostics that are designed, manufactured and used within a single laboratory.

These tests are referred to as Laboratory Developed Tests (“LDTs”).

We currently market our products as LDTs.

The FDA has adopted a policy of enforcement discretion with respect to LDTs whereby the FDA does not actively require premarket review of LDTs or otherwise impose its requirements applicable to other medical devices on LDTs.

On October 3, 2023, the FDA issued proposed regulations under which it would phase out its enforcement discretion approach to LDTs over a period of four years.

Although the proposed regulation is subject to a period of notice and comment, if finalized as proposed, we would be required to obtain premarket approval (“PMA”) for certain of our tests by October 1, 2027.

We would also be subject to device registration and listing requirements, medical device reporting requirements and the requirements of the FDA’s Quality System Regulation.

We may be required to conduct clinical trials prior to continuing to sell our existing products or launching any other products we may develop.

This may increase the cost of conducting, or otherwise harm, our business.

Even if the FDA does not modify its policy of enforcement discretion, the FDA may disagree that we are marketing our LDTs within the scope of its policy of enforcement discretion and may impose significant regulatory requirements.

While we believe that we are currently in material compliance with applicable laws and regulations as historically enforced by the FDA, we cannot assure you that the FDA will agree with our determination.

A determination that we have violated these laws and regulations, or a public announcement that we are being investigated for possible violations, could adversely affect our business, prospects, results of operations or financial condition.

If the FDA begins to actively regulate our diagnostic products, we may be required to obtain premarket clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (the “FDCA”) or a PMA.

The process for submitting a 510(k) premarket notification and receiving FDA clearance usually takes from three to 12 months, but it

can take significantly longer and clearance is never guaranteed.

The process for submitting and obtaining FDA approval of a PMA is much more costly, lengthy and uncertain.

It generally takes from one to three years or even longer, and approval is not guaranteed.

PMA approval typically requires extensive clinical data and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process.

Despite the time, effort and expense expended, there can be no assurance that a particular device ultimately will be cleared or approved by the FDA through either the 510(k) clearance process or the PMA process on a timely basis, or at all.

Moreover, there can be no assurance that any cleared or approved labeling claims will be consistent with our current claims or adequate to support continued adoption of and reimbursement for our products.

If premarket review is required for some or all of our products, the FDA may require that we stop selling our products pending clearance or approval, which would negatively impact our business.

Even if our products are allowed to remain on the market prior to clearance or approval, demand or reimbursement for our products may decline if there is uncertainty about our products, if we are required to label our products as investigational by the FDA, or if the FDA limits the labeling claims we are permitted to make for our products.

As a result, we could experience significantly increased development costs and a delay in generating additional revenue from our products, or from other pipeline products.

If the FDA imposes significant changes to the regulation of LDTs it could reduce our revenues or increase our costs and adversely affect our business, prospects, results of operations or financial condition.

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

If the FDA changes or ends its policy of enforcement discretion with respect to LDTs, whether by finalization of regulations initial proposed on October 3, 2023, or otherwise, and our products become subject to the FDA’s requirements for premarket review of medical devices, we may be required to cease commercial sales of our products and conduct clinical trials prior to making submissions to the FDA to obtain premarket clearance or approval.

If we are required to conduct such clinical trials, delays in the commencement or completion of clinical trials could significantly increase our product development costs and delay commercialization of any currently marketed testing that we may be required to cease selling or the commercialization of any future tests that we may develop.

Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval.

The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial.

The FDA requires medical device manufacturers to comply with, among other things, current good manufacturing practices for medical devices, known as the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process;

the medical device reporting regulation, which requires 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 it were to recur;

labeling regulations, including the FDA’s general prohibition against promoting products for unapproved or ‘‘off-label’’ uses;

and the reports of corrections and removals regulation, which requires manufacturers to report to the FDA if a device correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the FDCA caused by the device which may present a risk to health.

Even if we were able to obtain FDA clearance or approval for one or more of our products, if required, a diagnostic test may be subject to limitations on the indications for which it may be marketed or to other regulatory conditions.

In addition, such clearance or approval may contain requirements for costly post-market testing and surveillance to monitor the safety or efficacy of the test.

In addition, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approvals.

If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing authorization that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.

Risks Related to Employee Matters and Managing Growth and Other Risks Related to Our Business

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A failure in any one of these areas could make it difficult for us to meet market expectations for our products and could damage our reputation and the prospects for our business.

In July 2023, in response to significant demand, we elected to temporarily pause accepting additional orders for the TissueCypher Barrett’s Esophagus Test in order to bring our process improvements and additional instrumentation and personnel on line.

We are currently working through these efforts and believe that we will be able to begin accepting new orders prior to the end of third quarter of 2023.

However, there can be no assurance that our efforts will be successful.

In July 2023, we elected to temporarily pause accepting additional TissueCypher orders to focus on scaling efforts and to work through a significant backlog of orders.

In September 2023, we resumed accepting new orders for testing in a phased approach consistent with continued scaling activity aimed at accommodating current demand and future growth.

As of mid-October 2023, we have completed the pre-existing backlog orders.

However, there can be no assurance that our efforts will be successful, which could damage our reputation and the prospects for our business.

We may not be able to maintain the quality or expected turnaround times of our products, or satisfy customer demand as it grows.

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The quality of our products and services may suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

We have engaged in, and may continue to engage in, strategic transactions, such as the acquisition of businesses, assets, products or technologies, which could be disruptive to our existing operations, divert the attention of our management team and adversely impact our liquidity, cash flows, financial condition and results of operations.*

From time to time, we may consider strategic opportunities and engage in transactions such as acquisitions of businesses, assets, products or technologies, as well as technology licenses or investments in complementary businesses.

For example, in May 2021, December 2021 and April 2022, we completed the acquisitions of the Myriad MyPath Laboratory, Cernostics and AltheaDx, respectively.

These and any other strategic acquisition transactions may entail numerous operational and financial risks, including:

• delays, difficulties and higher than expected costs associated with integration activities, such as those involving operational processes, regulatory and licensure compliance, personnel and information technology systems;

• difficulties in scaling and growing the operations of acquired businesses in a cost-efficient manner;

• disruption of our existing business operations and diversion of management’s time, focus and attention;

• decreases in our liquidity and operating cash flows, increases in our overall operating costs, substantial amounts of amortization expense, increased capital expenditure requirements and non-recurring charges, including possible impairments of acquired assets and losses on the remeasurement of contingent consideration;

• incurrence of substantial debt or dilutive issuances of equity securities, the assumption of additional liabilities, exposure to unknown liabilities and being subject to disputes with former owners of acquired businesses;

• inability to retain key personnel of any acquired businesses;

• failure to realize any of the anticipated revenues, synergies, efficiencies or other benefits of a transaction within our estimated time frame or at all.

With regard to our acquisitions of the Myriad MyPath Laboratory, Cernostics and AltheaDx, actual results may differ materially from our plans and expectations.

For example, there can be no assurances regarding our ability to successfully scale and integrate the MyPath Melanoma, TissueCypher and IDgenetix tests into our commercial offerings and the ability of the combined strengths of Castle, the Myriad MyPath Laboratory, Cernostics or AltheaDx to position us for continued growth and success as a leader in the diagnostics space.

Further, there are inherent execution and business risks associated with managing the integration and growth objectives of more than one acquisition at the same time and such circumstances may have the effect of heightening the operational and financial risks related to acquisitions noted above and the other risks described in this “Risk Factors” section.

In July 2023, we elected to temporarily pause accepting additional TissueCypher orders to focus on scaling efforts and to work through a significant backlog of orders.

In September 2023, we resumed accepting new orders for testing in a phased approach consistent with continued scaling activity aimed at accommodating current demand and future growth.

As of mid-October 2023, we have completed the pre-existing backlog orders.

However, there can be no assurance that we will be successful in our efforts.

We are unable to predict the timing, size or nature of any future transactions, whether they will be completed or financed on favorable terms, if at all, or what the impact of those transactions might be on our financial results, including if such transactions are not effectively and profitably integrated into our business.

Our failure to successfully complete the integration of any business that we acquire could have an adverse effect on our prospects, business activities, cash flows, financial condition, results of operations and stock price.

Additionally, our ability to successfully integrate, manage and derive financial and other benefits from any acquired business, asset, product or technology cannot be assured given our limited historical experience with such transactions.

Risks Related to Ownership of Our Common Stock

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• interest rates and the rate of inflation;

• the extent and duration of the impacts on our operations of general political and economic conditions, including COVID-19, the ongoing conflict between Ukraine and Russia, economic slowdowns, recessions or market corrections, the duration and effects of elevated inflation, rising interest rates and tightening of credit markets resulting from the conflict or other evolving macroeconomic developments;

• the extent and duration of the impacts on our operations of general political and economic conditions, including public health crises such as COVID-19, the Israel-Hamas war, the ongoing conflict between Ukraine and Russia, economic slowdowns, recessions or market corrections, the duration and effects of elevated inflation, rising interest rates and tightening of credit markets resulting from the conflict or other evolving macroeconomic developments;

• trading activity by a limited number of stockholders who together beneficially own a significant percentage of our outstanding common stock;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors