What changed in this filing

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Item 1. Business

2021-03-16 compared with 2020-03-25 · 257 added, 237 removed, 648 unchanged (43% of the section changed)

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Our business model of integrating testing products and therapeutics positions us to offer targeted solutions to rheumatologists and, ultimately, better serve patients.

We currently market nine testing products under our AVISE ® brand, which we are leveraging to establish partnerships with leading pharmaceutical companies.

In December 2018, we entered into a co-promotion agreement with Janssen Biotech, Inc., or the Janssen agreement, to exclusively promote SIMPONI ® (golimumab), a subcutaneous, once-per-month, anti-tumor necrosis factor, or anti-TNF, biologic prescribed in combination with methotrexate, in the United States for the treatment of adult patients with moderate to severe RA and for other indicated rheumatic diseases.

Combined U.S.

sales of SIMPONI ® and SIMPONI ARIA ® , an intravenous formulation, were approximately $1.2 billion in 2019, of which we estimate approximately 50% was from sales of SIMPONI ® .

We began direct promotion of SIMPONI ® in January 2019 and expanded our salesforce from 31 representatives as of December 31, 2018 to 50 representatives as of December 31, 2019 to support these promotion efforts.

Unlike many diagnostic salesforces that are trained only to understand the comparative benefits of their tests, the specialized backgrounds of our salesforce coupled with our comprehensive training enables our sales representatives to interpret results from our de-identified patient test reports and provide unique insights in a highly tailored discussion with rheumatologists.

We therefore believe our strategy of integrating the promotion of testing products and therapeutics uniquely positions us to expand SIMPONI ® ’s U.S.

market share.

Our SIMPONI ® promotion efforts contributed approximately $ 1.5 million in incremental revenue in 2019 with our quarterly tiered promotion fee based on the incremental increase in total prescribed units above a predetermined average baseline of approximately 29,000 prescribed units per quarter.

We believe our strategy of integrating the promotion of testing products and therapeutics differentiates us from other diagnostic and pharmaceutical companies, and provides our specialized salesforce greater access to rheumatologists.

Our integrated testing and therapeutics strategy results in a unique opportunity to promote targeted therapies in patient focused sales calls with rheumatologists, including those with whom we have a longstanding relationship and who have a history using our portfolio of testing products.

We currently market 10 testing products under our AVISE ® brand that allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases.

Our lead testing product, AVISE ® CTD, enables differential diagnosis for patients presenting with symptoms indicative of a wide variety of connective tissue diseases, or CTDs, and other related diseases with overlapping symptoms.

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There is an unmet need for rheumatologists to add clarity in their CTD clinical evaluation, and we believe there is a significant opportunity for our tests that enable the differential diagnosis of these diseases, particularly for potentially life-threatening diseases such as SLE.

We are leveraging our portfolio of testing products to establish partnerships with leading pharmaceutical companies, academic research centers and patient advocacy organizations.

In December 2018, we entered into a co-promotion agreement, or the Janssen Agreement, with Janssen Biotech, Inc., or Janssen, to exclusively promote SIMPONI ® (golimumab) in order to advance our integrated testing and therapeutics strategy, and we began direct promotion of SIMPONI ® in January 2019.

We also have agreements with other leading pharmaceutical companies and clinical research organizations, including GlaxoSmithKline LLC, or GSK, Covance Inc.

and Parexel that leverage our testing products and/or the data generated from such tests.

We provide GSK, a leader in lupus therapeutics, our test result data to provide market insight into and help increase awareness of the benefits of an early and accurate diagnosis of SLE and lupus nephritis, and monitoring disease activity.

We partner with academic research centers and patient advocacy organizations, such as Brigham and Women's Hospital, Hospital for Special Surgery, and Duke University as well as the Lupus Foundation of America, to help improve the quality of life for people affected by autoimmune diseases through programs of research, education, support and advocacy.

We plan to pursue additional partnerships that are synergistic with our evolving portfolio of testing products.

We have demonstrated a strong track record of developing innovative testing products that meet the needs of diagnosing, prognosing and monitoring CTDs, as illustrated below:

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Depending on disease severity, AVISE ® SLE Monitor may be utilized by patients multiple times a year throughout their lives.

Our RA-focused testing products include AVISE ® MTX and AVISE ® Anti-CarP.

AVISE ® MTX is a drug monitoring test designed to aid in the optimization of methotrexate therapy, the standard of care and first-line therapy for patients with RA.

AVISE ® MTX is based on our proprietary methotrexate polyglutamate, or MTXPG, technology that measures blood levels of MTXPGs, the active metabolite of methotrexate linked to disease control in RA patients.

Measuring MTXPGs allows rheumatologists to identify patients presenting with inadequate exposure to methotrexate enabling them to optimize dosing and achieve therapeutic levels commensurate with adequate disease control.

AVISE ® MTX is compatible with AVISE ® Touch, our low-volume test sample collection method that allows for a micro-volume blood sample to be collected anywhere from a simple fingerstick.

AVISE ® Anti-CarP, which measures anti-carbamylated protein antibody, or anti-CarP, was developed by the Leiden University Medical Center, and we introduced it as a biomarker-driven RA prognostic test through a distribution agreement with Inova Diagnostics, Inc.

with the goal of identifying patients prone to more severe disease.

We market our AVISE ® testing products using our specialized salesforce.

Since the launch of AVISE ® CTD in 2012 through December 31, 2019, we have delivered over 387,000 of these tests, representing a compound annual growth rate of 81%, with limited incremental investment in our commercial infrastructure.

Over 105,000 AVISE ® CTD tests were delivered in 2019, representing 26% growth over 2018, and the number of ordering healthcare providers in the fourth quarter of 2019 reached 1,707, representing 34% growth over the same period in 2018.

In the fourth quarter of 2019, we reached 572 adopting healthcare providers, which we classify as those who had previously prescribed at least 11 diagnostic tests in the corresponding period, compared to 506 in the same period in 2018.

A high percentage of adopting healthcare providers continue to order tests in subsequent quarters, including a retention rate of approximately 98% among adopting healthcare providers in the fourth quarter of 2019.

In addition, we continue to populate a growing proprietary database of over 384,000 de-identified patient test results.

We believe the insight emerging from these results has the potential to unlock value for pharmaceutical and biotechnology companies in the commercialization of therapeutics.

We believe we also have the ability to further

leverage our database to optimize patient selection in clinical trials for companies developing therapeutics for autoimmune and autoimmune-related diseases.

Since the launch of AVISE ® CTD in 2012 and through December 31, 2020, we have delivered over 487,000 of these tests.

For the year ended December 31, 2020, 100,450 AVISE ® CTD tests were delivered, representing an approximate 5% decline over the same period in 2019.

The number of ordering healthcare providers reached a record of 2,500 for the year ended December 31, 2020, representing approximately 5% growth over the same period in 2019.

In the fourth quarter of 2020, the number of ordering healthcare providers reached 1,690 compared to 1,707 in the same period in 2019, and we reached a record 635 adopting healthcare providers (defined as those who previously prescribed at least 11 diagnostic tests in the corresponding period) compared to 572 in the same period in 2019.

A high percentage of adopting healthcare providers continue to order tests in subsequent quarters, including a retention rate of approximately 99% among adopting healthcare providers from the third quarter of 2020 that order at least one diagnostic test in the fourth quarter of 2020.

In addition, we continue to populate a growing proprietary database of de-identified patient test results from our clinical studies and our clinical laboratory.

We believe the insight emerging from these results has the potential to unlock value for pharmaceutical and biotechnology companies in the development and commercialization of therapeutics.

We believe we also have the ability to further leverage our database to optimize patient selection in clinical trials for companies developing therapeutics for autoimmune and autoimmune-related diseases.

We plan to collaborate with our existing and future pharmaceutical and biotechnology partners to help maximize the full value of our in-house database.

Unlike many diagnostic salesforces that are trained only to understand the comparative benefits of their tests, the specialized backgrounds of our salesforce coupled with our comprehensive training enables our sales representatives to interpret results from our de-identified test reports and provide unique insights in a highly tailored discussion with rheumatologists.

Our integrated testing and therapeutics strategy results in a unique opportunity to promote and sell targeted therapies in patient focused sales calls with rheumatologists, including those with whom we have a longstanding relationship and who have a history using our portfolio of testing products.

In December 2018, we entered into the Janssen agreement for the promotion of SIMPONI ® in order to advance our integrated testing and therapeutics strategy.

To support the co-promotion of SIMPONI ® to rheumatologists, we expanded our salesforce from 31 representatives as of December 31, 2018 to 50 representatives as of December 31, 2019 and expect to continue to expand our salesforce in 2020.

We also have agreements with other leading pharmaceutical companies, including GlaxoSmithKline LLC, or GSK, and Horizon Pharma USA, Inc., or Horizon Therapeutics, that leverage our testing products and the data generated from such tests.

We provide GSK, a leader in lupus therapeutics, our test result data to provide market insight into and help increase awareness of the benefits of an early and accurate diagnosis of SLE.

Our agreement with Horizon Therapeutics entails utilizing our AVISE ® MTX test to report on levels of MTXPG in patients undergoing methotrexate therapy in combination with its anti-gout product KRYSTEXXA ® in an ongoing Phase 4 clinical trial.

We plan to pursue additional partnerships with a focus on integrating therapeutics that are synergistic with our evolving portfolio of testing products.

We believe our integrated testing and therapeutics strategy differentiates us from other diagnostic and pharmaceutical companies, and results in a unique opportunity to promote and sell targeted therapies in patient focused sales calls with rheumatologists, including those with whom we have a longstanding relationship and who have a history using our portfolio of testing products.

We intend to leverage our integrated testing and therapeutics strategy to establish additional partnerships.

We are led by an experienced management team with unique capabilities to execute on our strategy of integrating the promotion of testing products and therapeutics.

Our senior management has an average of over 20 years of experience in the healthcare industry and a few were previously involved with successfully building Prometheus Laboratories Inc., or Prometheus, which was focused on integrating diagnostics and therapeutics, prior to its acquisition by Nestlé Health Science S.A.

Our senior management has an average of over 20 years of experience in the healthcare industry with a focus on integrating diagnostics and therapeutics.

We develop and commercialize next-generation testing products and promote synergistic therapeutics to ultimately improve the continuum of care for patients suffering from debilitating and chronic autoimmune diseases.

The key tenets of our business strategy include:

▪ Continue our track record of developing innovative testing products.

Since inception, we have demonstrated a strong track record of developing testing products that address the challenges in the differential diagnosis, prognosis and monitoring of patients with autoimmune and autoimmune-related diseases.

We are leveraging our proprietary CB-CAPs and methotrexate polyglutamate, or MTXPG, technologies to develop additional testing products designed to have superior clinical utility for CTDs.

We believe our commitment to innovating our portfolio of testing products will further strengthen our relationships with rheumatologists and our value proposition to our existing and future pharmaceutical and biotechnology partners.

▪ Drive additional market penetration for our testing products.

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This will support our strategy of integrating the promotion of testing products and therapeutics.

In addition, we will continue to expand our efforts in the targeted promotion and education of rheumatologists and payers as to the clinical and cost benefits of our testing products.

In addition, we will continue to expand our efforts in the targeted promotion and education of rheumatologists and payors as to the clinical and cost benefits of our testing products.

We believe these efforts will position us to capture additional market share for our portfolio of testing products.

▪ Integrate the promotion of testing products and therapeutics for autoimmune and autoimmune-related diseases.

▪ Integrate the promotion of testing products and therapeutics for autoimmune and autoimmune-related diseases and establish additional partnerships.

Our integrated testing and therapeutics strategy leverages our sales and marketing efforts, targeting rheumatologists for the commercialization of our testing products to promote therapeutics.

This establishes a compelling synergy compared to traditional pharmaceutical sales resulting in greater access to rheumatologists and positions us to potentially create value for pharmaceutical partners.

In January 2019, we began our exclusive promotion of SIMPONI ® in the United States, leveraging our integrated testing and therapeutics strategy, for the treatment of adult patients with moderate to severe RA and for other indicated rheumatic diseases.

▪ Continue our track record of developing innovative testing products.

We are leveraging our proprietary CB-CAPs and MTXPG technologies to develop additional testing products designed to have superior clinical utility for CTDs.

We believe our commitment to

innovating our portfolio of testing products will further strengthen our relationships with rheumatologists and our value proposition to our existing and future pharmaceutical and biotechnology partners.

▪ Establish additional therapeutic partnerships.

We believe our agreements with Janssen, and other leading pharmaceutical companies validate our unique value proposition to pharmaceutical companies seeking a competitive edge for commercializing therapeutics for autoimmune and autoimmune-related diseases.

We intend to leverage our integrated testing and therapeutics strategy to establish additional partnerships with a focus on the commercialization of therapeutics that are synergistic with our testing products.

▪ Achieve meaningful margin expansion.

We believe growth from the promotion of therapeutics will meaningfully improve our margin profile and further support our goal of achieving profitability.

We also expect an increase to our gross margins in the first quarter of 2020 following the expiration of a 10% annual royalty on our CB-CAPs technology.

In addition, we believe we are well positioned to drive further margin expansion through a continued focus on increasing operating leverage through the implementation of certain internal initiatives, such as conducting additional validation and reimbursement oriented clinical studies to facilitate payer coverage of our testing products, capitalizing on our growing reagent purchasing to negotiate improved volume-based pricing and automation in our clinical laboratory to reduce material and labor costs.

In January 2019, we began our exclusive promotion of SIMPONI ® in the United States.

In addition, we believe our agreements with leading pharmaceutical companies and clinical research organizations validate our unique value proposition to partners seeking a competitive edge for developing and commercializing therapeutics for autoimmune and autoimmune-related diseases.

We intend to leverage our integrated testing and therapeutics strategy to establish additional partnerships with a focus on the development and commercialization of therapeutics that are synergistic with our testing products.

▪ Maintain meaningful margin.

We realized an increase to our gross margins beginning in the first quarter of 2020 following the expiration of a 10% annual royalty on our CB-CAPs technology.

We believe we are well positioned to maintain meaningful margin through a continued focus on increasing operating leverage through the implementation of certain internal initiatives, such as conducting additional validation and reimbursement oriented clinical studies to facilitate payor coverage of our testing products, capitalizing on our growing reagent purchasing to negotiate improved volume-based pricing and automation in our clinical laboratory to reduce material and labor costs.

However, our efforts to maintain a meaningful margin may be partially offset by our ability to generate meaningful co-promotion revenue in 2021.

Autoimmune and Connective Tissue Diseases

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CTDs are a sub-category of autoimmune diseases involving inflammation of the joints, tissues and internal organs.

Persons with CTDs often present to their rheumatologist with complaints of joint pain, fatigue, unexplained fever, inflammation, rash, stiffness and muscle aches.

Persons with CTDs often present to their rheumatologist with complaints of joint pain, fatigue, unexplained fever,

inflammation, rash, stiffness and muscle aches.

These symptoms overlap among numerous CTDs, including SLE, one of the most severe CTDs and historically difficult to rule out, as well as other autoimmune-related diseases and other disorders that mimic these diseases, such as fibromyalgia.

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ANA are a group of autoantibodies produced by a person’s immune system when it fails to adequately distinguish between self and non-self.

The ANA test detects these autoantibodies in the blood and is a useful screening tool for SLE and other

autoimmune and autoimmune-related diseases.

The ANA test detects these autoantibodies in the blood and is a useful screening tool for SLE and other autoimmune and autoimmune-related diseases.

The vast majority of SLE patients test positive for ANA.

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This binding lasts for the life of the cell and represents a more stable and reliable indicator of complement activation than measuring C3 and C4 alone.

In March 2011, the first new biologic drug targeting treatment of SLE in over 50 years, GSK’s Benlysta ® , was approved by the U.S.

Food and Drug Administration, or the FDA.

It is the only approved biologic for the treatment of SLE.

Since its approval, there have been a number of drug development programs that have failed in SLE, which may suggest that guidelines for classifying SLE patients and the endpoints used to determine clinical effectiveness have not adequately addressed the complexity of the disease process and its heterogeneous population.

In March 2011, the first new biologic targeting treatment of SLE in over 50 years, GSK’s Benlysta ® , was approved by the U.S.

Food and Drug Administration, or the FDA, and in December 2020, the FDA approved this biologic drug

for the treatment of lupus nephritis.

It is the only approved biologic for the treatment of active, antibody-positive SLE who are receiving standard therapy, and in December 2020, the FDA approved this biologic for the treatment of adult patients with active lupus nephritis who are receiving standard therapy.

Since Benlysta ® 's approval, there have been a number of drug development programs that have failed in SLE, which may suggest that guidelines for classifying SLE patients and the endpoints used to determine clinical effectiveness have not adequately addressed the complexity of the disease process and its heterogeneous population.

We believe biopharmaceutical companies would benefit from the differential diagnosis enabled by our AVISE ® testing products in order to better identify sub-populations of SLE patients for targeted therapies.

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The anti-TNFs dominate the therapy for RA and generally are the first biologics chosen to augment methotrexate when patients are not achieving a satisfactory response.

We currently market nine testing products under our AVISE ® brand that allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases, including SLE and RA.

We currently market 10 testing products under our AVISE ® brand that allow for the differential diagnosis, prognosis and monitoring of complex autoimmune and autoimmune-related diseases, including SLE and RA.

Our product portfolio integrates our proprietary CB-CAPs technology, which is a stable and reliable method for differentially diagnosing SLE.

We focus on leveraging our portfolio of testing products to promote therapeutics through our sales channel targeting the approximately 5,000 rheumatologists across the United States.

In December 2018, we entered into the Janssen agreement to exclusively promote SIMPONI ® in the United States for the treatment of adult patients with moderate to severe RA and for other indicated rheumatic diseases.

In January 2019, we began direct promotion of SIMPONI ® with our specialized salesforce.

We are focused on leveraging our portfolio of testing products to co-promote therapeutics with existing partners and future partners through our sales channel targeting the approximately 5,000 rheumatologists across the United States.

Our Proprietary Technologies

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For example, increased synthesis of C3 and C4 by the liver can offset increased C3 and C4 breakdown during activation of the complement cascade, resulting in no change in serum levels.

While the limitations and drawbacks of measuring standard components of the complement system, such as C3 and C4, are well recognized by the medical community, these laboratory biomarkers are part of international guidelines for the classification of SLE.

While the limitations and drawbacks of measuring standard

components of the complement system, such as C3 and C4, are well recognized by the medical community, these laboratory biomarkers are part of international guidelines for the classification of SLE.

We believe the availability of novel complement biomarkers supporting or replacing standard C3 and C4 measures will be of great value for rheumatologists and ultimately their patients.

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Rheumatologists would typically request the AVISE ® APS test in patients who initially tested positive for one or more APS biomarkers contained in AVISE ® CTD, or in the management of patients experiencing a high-risk pregnancy.

AVISE ® Vasculitis AAV

In September 2020, we launched AVISE ® Vasculitis AAV which utilizes a testing panel of individual analytes designed to provide physicians with rapid and reliable results in the assessment and monitoring of anti-neutrophil cytoplasmic antibody, or ANCA, associated vasculitis, or AAV.

AAV is a group of autoimmune diseases characterized by vascular inflammation and damage.

Early signs and symptoms vary greatly and are not always indicative of the severity of the disease.

Rapid and accurate testing is essential to prevent death and long-term disability.

AVISE ® SLE Prognostic

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AVISE ® Anti-CarP

with the goal of identifying patients prone to more severe disease.

We were the first commercial laboratory to make testing for anti-CarP available in the United States with the introduction of AVISE ® Anti-CarP in 2018.

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Furthermore, RA patients positive for Anti-CarP have an increased risk for more severe RA disease, including permanent joint damage .

AVISE ® PC4d is one of our newest offerings, which reflects over 10 years of research efforts and employs our proprietary CB-CAPs technology.

AVISE ® PC4d, introduced in 2018, reflects over 10 years of research efforts and employs our proprietary CB-CAPs technology.

This proprietary CB-CAP biomarker measures platelet- bound C4d, or PC4d, and has been shown in clinical studies to have significant association with thrombosis and ischemic stroke in SLE.

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AVISE ® SLE Monitor demonstrates correlation to SLE disease activity and is therefore designed to enable rheumatologists to effectively assess and optimize therapeutic intervention in patients diagnosed with SLE.

Additionally, AVISE ® SLE Monitor measures EC4d, anti-C1q, C3, C4 and anti-dsDNA which can assist physicians with managing their lupus nephritis patients.

Depending on disease severity, our AVISE ® SLE Monitor testing product may be utilized by patients multiple times a year and throughout their lives.

We believe AVISE ® SLE Monitor will play an increasingly important role in the management of SLE patients and further solidify the role and relationship of AVISE ® testing products for these patients.

AVISE ® MTX is a patented and validated blood test that precisely measures levels of MTXPG, the active form of methotrexate, in the patient’s blood.

In the first quarter of 2021, physicians will have the option to obtain complete blood counts with differential (CBC+diff) and serum creatinine and C-reactive protein measurements for their patients along with their AVISE ® SLE Monitor test order.

AVISE ® MTX is a patented and validated blood test that precisely measures blood levels of MTXPG, the active metabolite of methotrexate linked to disease control in RA patients.

There is large variability in the way patients absorb and metabolize methotrexate, leaving rheumatologists unsure of what steps to take when a patient has an inadequate response.

Methotrexate is the most widely prescribed drug by rheumatologists in the treatment of RA.

When faced with a patient who is not responding to methotrexate therapy, the options include increasing the dose, switching to a parenteral delivery method and/or advancing to a more costly biologic therapy.

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We believe measuring HCQ makes the patient accountable, and also helps to determine whether HCQ blood levels are adequate and consistent with clinical efficacy.

The addition of new and costly biologic therapies approved for the treatment of SLE may drive interest by all healthcare stakeholders, especially payers, to adopt an approach that optimizes a generic drug before advancing to a costlier alternative.

The addition of new and costly biologic therapies approved for the treatment of SLE may drive interest by all healthcare stakeholders, especially payors, to adopt an approach that optimizes a generic drug before advancing to a costlier alternative.

AVISE ® HCQ is also compatible with AVISE ® Touch.

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AVISE ® CTD Report

Combined U.S.

sales of SIMPONI ® and SIMPONI ARIA ® were approximately $1.2 billion in 2019, of which we estimate approximately 50% was from sales of SIMPONI ® .

We began direct promotion of SIMPONI ® to rheumatologists with our specialized salesforce in January 2019 and expanded our salesforce from 31 representatives as of December 31, 2018 to 50 representatives as of December 31, 2019 and expect to continue to expand our salesforce in 2020.

We believe our salesforce allows us to reach our target of the top 5,000 rheumatologists in the United States.

In December 2018, we entered into the Janssen Agreement to exclusively promote SIMPONI ® in the United States for the treatment of adult patients with moderate to severe RA and for other indicated rheumatic diseases, and we began direct promotion of SIMPONI ® to rheumatologists with our specialized salesforce in January 2019.

We believe our salesforce allows us to reach the approximately 5,000 rheumatologists in the United States.

Additionally, we believe that educating providers regarding SIMPONI ® has and will continue to facilitate greater acceptance of SIMPONI ® .

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market share.

We will receive a quarterly tiered promotion fee ranging from $750 to $1,250 per prescription based on incremental total prescribed units above a predetermined average baseline of approximately 29,000 prescribed units per quarter for an initial term of 18 months.

We estimate the total U.S.

addressable market for SIMPONI’s ® approved indications, including RA, psoriatic arthritis and ankylosing spondylitis, to be approximately $28 billion.

Based on this estimated market size, each incremental 1% of U.S.

market share we are able to capture for SIMPONI ® above the predetermined baseline of 29,000 prescribed units per quarter could result in incremental revenue to us of up to $84 million.

We recognized co-promotional revenue of approximately $ 1.5 million during the year ended December 31, 2019 and expect to continue to recognize revenue as we perform co-promotional services based on the number of total prescribed units of SIMPONI ® over the predetermined baseline.

For more information regarding the Janssen agreement, see “—Agreements with Pharmaceutical Companies.”

In recent years, advancements in the understanding of the autoimmune and autoimmune-related disease process have led to a significant number of novel biologic drugs and drug development initiatives, especially in RA and SLE, and we intend to leverage our integrated testing and therapeutics strategy to establish additional partnerships with a focus on the commercialization of therapeutics that are synergistic with our testing products.

We recognized co-promotional revenue of approximately $5.1 million and $1.5 million during the years ended December 31, 2020 and 2019, respectively.

For more information regarding the Janssen Agreement, including predetermined baselines and minimum promotion fee levels for 2021, see “—Agreements with Pharmaceutical Companies.”

In recent years, advancements in the understanding of the autoimmune and autoimmune-related disease process have led to a significant number of novel biologic drugs and drug development initiatives, especially in RA and SLE, and we intend to leverage our integrated testing and therapeutics strategy to establish additional partnerships with a focus on the development and commercialization of therapeutics that are synergistic with our testing products.

Our Pipeline and Growth Opportunities

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For example, we are focused on leveraging our proprietary CB-CAPs technology by developing a thrombosis risk score with PC4d in prognosing cardiovascular events in SLE.

We plan to initiate proof of concept studies to develop alternatives to biopsy in the monitoring of transplant rejection and the differential diagnosis of fibromyalgia in the primary care physician setting.

In addition, we are developing a panel of assays that we believe may have high prognostic value in patients with RA, Sjögren’s, fibromyalgia and autoimmune thyroid, and we continue to evaluate the use of AVISE ® Touch and microfluidics for our broader portfolio of testing products to increase convenience and cost-effectiveness.

In addition, we are developing a panel of assays that we believe may have high diagnostic and/or prognostic value in patients with fibromyalgia, RA, Sjögren’s and myositis, and we continue to evaluate the use of AVISE ® Touch and microfluidics for our broader portfolio of testing products to increase convenience and cost-effectiveness.

Sales and Marketing

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We believe that a collaborative relationship with rheumatologists helps build a lasting sales channel through which additional products and services can be introduced.

As of December 31, 2019, our overall sales team consisted of approximately 60 members, including 50 sales representatives, six regional sales directors, one vice president, one senior vice president and two managed care professionals.

In connection with the promotion of SIMPONI ® , we expanded the number of sales representatives from 31 representatives as of December 31, 2018 to 50 representatives as of December 31, 2019, who are managed by a team of six regional sales directors.

We expect to continue to expand our salesforce by up to approximately 25 additional representatives in 2020.

Our increased salesforce allows for expansion into markets not previously covered by us.

In addition, this salesforce expansion is expected to significantly increase the number of sales calls made per year, helping us to cultivate a strong collaborative relationship with rheumatologists through increased interactions.

As of December 31, 2020, our overall sales team consisted of approximately 66 members.

We have a salesforce of 53 representatives, who are managed by a team of seven regional sales directors.

Our salesforce is organized into seven regions which include, Pacific, Southwest, Midwest, Great Lakes, Southeast, Atlantic and Northeast.

As of December 31, 2020, our salesforce was covering a total of 56 territories within the seven regions.

We expanded the reach and frequency of our salesforce by adding seven new territories in 2021 for a total of 63 territories, as well as the creation of an inside salesforce to further our reach with rheumatologists in white space, complementing our

decentralized salesforce and covering vacant territories.

In addition, we expect to increase our salesforce in 2021, which is expected to significantly increase the number of sales calls made per year, helping us to cultivate a strong collaborative relationship with rheumatologists through increased interactions.

To further support our promotional efforts, we have a centralized, dedicated client services department with a high level of technical training that augments our specialized salesforce and marketing activities and enhances sales efficiency and customer satisfaction by providing personalized customer support.

We believe our salesforce allows us to reach our target of the top 5,000 rheumatologists in the United States.

We believe our salesforce allows us to reach the approximately 5,000 rheumatologists in the United States.

Right Doctor, Right Message, Right Frequency

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We strategically target the highest-potential practices by utilizing various data sources (e.g., market analytics, demographic data, historical biologic and diagnostic product usage trends).

Furthermore, we believe the increased access afforded by our testing products will allow for patient-focused messaging, including safety and efficacy data for SIMPONI ® and the increased accuracy of our testing products over current standard of care diagnostic methodologies.

Finally, we execute a high- frequency promotional strategy for our top targeted rheumatologists and their office personnel to build knowledge, understanding and retention of the benefits of SIMPONI ® and our testing products.

Furthermore, we believe the increased access afforded by our testing products will allow for patient-focused messaging and the increased accuracy of our testing products over current standard of care diagnostic methodologies.

We plan to leverage core channels for building awareness and adoption including our participation with multiple patient advocacy organizations, such as the Lupus Foundation of America, or LFA, and medical societies, such as the American College of Rheumatology, or ACR.

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Reimbursement

We seek reimbursement for our testing products from several sources, including commercial third-party payers, government payers and patients.

Payment from commercial third-party payers differs depending on whether we have entered into a contract with the payer as a participating provider or do not have a contract and are considered to be an out-of-network provider.

We seek reimbursement for our testing products from several sources, including commercial third-party payors, government payors and patients.

Payment from commercial third-party payors differs depending on whether we have entered into a contract with the payor as a participating provider or do not have a contract and are considered to be an out-of-network provider.

When we contract to serve as a participating provider, reimbursements are made pursuant to a percentage of our charges or a negotiated fee schedule amount.

Currently, we are reimbursed on an out-of-network basis, at various rates that can be higher or lower than participating providers.

Where we are not reimbursed in full, we may elect to appeal the insurer’s underpayment or denial of payment or seek payment from the patient.

We continue to focus on expanding coverage among existing contracted providers and achieving coverage with commercial payers, laboratory benefit managers and evidence review organizations.

We continue to focus on expanding coverage among existing contracted providers and achieving coverage with commercial payors, laboratory benefit managers and evidence review organizations.

We employ a multi-pronged strategy designed to achieve broad coverage and reimbursement for our AVISE ® testing products:

▪ Meet the evidence standards necessary to be consistent with leading clinical guidelines.

We believe inclusion in leading clinical guidelines plays a critical role in payers’ coverage decisions.

In order to change

clinical guidelines, tests must carry a high level of published evidence demonstrating analytical validity, clinical validity, clinical utility and cost effectiveness.

We believe inclusion in leading clinical guidelines plays a critical role in payors’ coverage decisions.

In order to change clinical guidelines, tests must carry a high level of published evidence demonstrating analytical validity, clinical validity, clinical utility and cost effectiveness.

When studies with such evidence are published in peer-reviewed journals, the authors of clinical guidelines may assess the level of evidence and determine whether modifying existing guidelines to include new technology is warranted.

For example, we previously conducted peer-reviewed, published clinical studies for AVISE ® MTX which helped us secure favorable coverage for that testing product from the MolDx Program, Noridian and various commercial Medicare Advantage plans.

The two largest rheumatology super groups have included AVISE ® MTX in their respective RA patient pathway guidelines for physician adoption of AVISE ® MTX.

In addition, UpToDate, a leading evidence-based clinical decision support resource for healthcare providers and payers, recommends the measurement of polyglutamate levels as done by AVISE ® MTX.

We have conducted, and continue to conduct, clinical validation and clinical utility studies for AVISE ® Lupus, which we believe will provide a basis for the ACR and/or UpToDate to consider inclusion of AVISE ® Lupus in their respective guidelines.

For example, we previously conducted peer-reviewed, published clinical studies for AVISE ® Lupus which helped us secure favorable coverage from various commercial plans.

We have conducted, and continue to conduct, clinical validation and clinical utility studies for AVISE ® Lupus, which we believe will provide a basis for the ACR White Paper and/or UpToDate to consider inclusion of AVISE ® Lupus in their respective guidelines.

In the future, we also intend to conduct similar studies in order to develop similar supporting literature with respect to our other testing products.

▪ Execute an internal managed care policy and claims adjudication function as part of our core business operations.

We employ a team of in-house claims processing and reimbursement specialists who work with patients and payers to obtain maximum reimbursement.

In parallel, a managed care team collaborates with our reimbursement specialists to ensure our payer outreach strategy reacts and anticipates the changing needs of our customer base.

We employ a team of in-house claims processing and reimbursement specialists who work with patients and payors to obtain maximum reimbursement.

In parallel, a managed care team collaborates with our reimbursement specialists to ensure our payor outreach strategy reacts and anticipates the changing needs of our customer base.

Our customer service team is an integral part of our reimbursement strategy, working with patients and rheumatologists to navigate the claims process.

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Key opinion leaders are able to influence clinical practice by publishing research and determining whether new tests should be integrated into clinical guidelines.

We collaborate with key opinion leaders early in the development process to ensure our clinical studies are designed and executed in a way that clearly demonstrates the benefits of our testing products to healthcare providers and payers.

Clinical Validation

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In early 2018, we initiated CARE for Lupus, a prospective, randomized, multi-site study to assess the performance of AVISE ® Lupus versus standard diagnostic laboratory tests, or SDLT.

A total of 145 patients were enrolled across 32 sites between July 2017 and December 2018, with 73 patients enrolled in the SDLT group and 72 patients in the

AVISE ® Lupus group.

A total of 145 patients were enrolled across 32 sites between July 2017 and December 2018, with 73 patients enrolled in the SDLT group and 72 patients in the AVISE ® Lupus group.

The CARE study was published in September 2019 in Lupus Science & Medicine.

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Finally, in the group of patients randomized to the AVISE ® Lupus group, a positive test result associated with an increase in patient-reported outcomes measuring health-related quality of life using five-level EQ-5D, or EQ5D-5L index score, from enrollment to visit 2 (p=0.028), and greater improvements were detectable when compared to the group of patients positive for AVISE ® Lupus and randomized to the SDLT arm (p=0.049).

In addition, we collaborated with leading health economic experts and clinicians to conduct a health economics study.

The results of that health economics study were presented at the ACR conference in 2018, and demonstrated the cost savings to a payer associated with AVISE ® Lupus over a one to four year time horizon.

Healthcare Economics

In October 2020, a study in collaboration with leading health economic experts was published in the journal ACR Open Rheumatology, titled "Evaluation of the Economic Benefit of Earlier Systemic Lupus Erythematosus (SLE) Diagnosis using a Multivariate Assay Panel (MAP)." This was the first ever evaluation of the economics of diagnosing SLE with AVISE ® Lupus (MAP) compared to standard diagnostic laboratory tests in a hypothetical cohort of 1,000 suspected SLE patients.

Over the four-year time horizon, AVISE ® Lupus demonstrated an estimated total direct cost savings of approximately $2.0 million, or $1,991 per patient.

In addition, the year one savings was $655,403, or $655 per eligible patient, with the use of AVISE ® Lupus, which aligns with early benefit to health plans looking for savings in the first year.

The above referenced studies are included in the AVISE ® Lupus Dossier.

We recently announced in March 2020 coverage and in-network contract with three California Medical Groups and anticipate additional coverage determinations and in-network contracting announcements in the second half of 2020.

In March 2020, we announced coverage and in-network contract with three California Medical Groups followed by coverage and an in-network agreement

with TRICARE East Humana Military and Highmark BCBS coverage policy.

We anticipate continued coverage determinations and in-network contracting announcements in 2021 and beyond.

We believe our reimbursement strategy, including establishing the clinical validation, clinical utility and health economics of our testing products will continue to allow us to drive an expansion in reimbursement coverage for our testing products.

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Our clinical laboratory reports all AVISE ® testing product results within five business days.

In the fourth quarter of 2020, we completed the build-out of approximately 2,000 additional square feet to our clinical laboratory.

We believe that our existing laboratory facilities are adequate to meet our business needs for at least the next 12 months and that additional laboratory space will be available on commercially reasonable terms, if required.

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Additionally, we compete against regional clinical laboratories providing testing in the autoimmune and autoimmune-related disease field, including Rheumatology Diagnostics Laboratories, Inc.

Other potential competitors include companies that might develop diagnostic or disease or drug monitoring products, such as Myriad Genetics, Inc., Progentec Diagnostics Inc., Kypha, LLC, Genalyte Inc., Oncimmune plc, DxTerity Diagnostics Inc., HealthTell, Inc.

(acquired by Laboratory Corporation of America in June 2020).

Other potential competitors include companies that might develop diagnostic or disease or drug monitoring products, such as Myriad Genetics, Inc., Progentec Diagnostics Inc., Scipher Medicine Corporation, Genalyte Inc., Oncimmune plc, DxTerity Diagnostics Inc.

and Immunovia AB.

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Direct competition for the promotion of SIMPONI ® includes all other companies with anti-TNF biologics and the marketing companies supporting their distribution and promotion.

These products include HUMIRA ® from Abbvie

Inc., ENBREL ® from Amgen Inc., CIMZIA ® from UCB, INFLECTRA ® from Pfizer Inc., or Pfizer, (biosimilar REMICADE ® ) and RENFLEXIS ® from Merck & Co.

These products include HUMIRA ® from Abbvie Inc., ENBREL ® from Amgen Inc., CIMZIA ® from UCB, INFLECTRA ® from Pfizer Inc., or Pfizer, (biosimilar REMICADE ® ) and RENFLEXIS ® from Merck & Co.

(biosimilar REMICADE ® ).

Additionally, we are restricted from promoting any other biologic or Janus kinase inhibitor, or JAK inhibitor, used for treatment of indications covered by the Janssen Agreement without Janssen's consent.

Additional competitors include companies with other biologic drugs indicated for RA that have significant sales or sales potential.

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Many of our potential competitors have widespread brand recognition and substantially greater financial, technical and research and development resources and selling and marketing capabilities than we do.

Others may develop products with prices lower than ours that could be viewed by rheumatologists and payers as functionally equivalent to our solution or offer solutions at prices designed to promote market penetration, which could force us to lower the list price of our products and affect our ability to achieve profitability.

Others may develop products with prices lower than ours that could be viewed by rheumatologists and payors as functionally equivalent to our solution or offer solutions at prices designed to promote market penetration, which could force us to lower the list price of our products and affect our ability to achieve profitability.

If we are unable to change clinical practice in a meaningful way or compete successfully against current and future competitors, we may be unable to increase market acceptance and sales of our products, which could prevent us from increasing our revenue or achieving profitability and could cause the market price of our common stock to decline.

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Janssen is responsible for all other aspects of the commercialization of SIMPONI ® under the Janssen agreement.

In exchange for our sales and co-promotional services, we are entitled to a quarterly tiered promotion fee ranging from $750 to $1,250 per prescription based on the incremental increase in total prescribed units of SIMPONI ® for that quarter over a predetermined baseline.

The predetermined average baseline for the initial term of 18 months is approximately 29,000 prescribed units per quarter, subject to adjustment under certain circumstances.

In September 2019 we exercised our option to extend the term of the Janssen agreement to December 31, 2021.

The predetermined average baseline for quarters ended March 31, 2019 to March 31, 2020 was approximately 29,000 prescribed units per quarter, subject to adjustment under certain circumstances.

In June 2020, due in part to COVID-19, we amended the Janssen Agreement, pursuant to which the predetermined average baseline for total prescribed units of SIMPONI ® for each remaining quarter in 2020, starting with the quarter ending June 30, 2020, was adjusted from approximately 29,000 to approximately 26,000 prescribed units per quarter, and subject to adjustment under certain circumstances.

For each of the third and fourth quarters of 2020, we received a minimum promotion fee of $0.3 million and the fee was capped at 5% above the adjusted predetermined baseline.

In December 2020, we further amended the Janssen Agreement, pursuant to which the predetermined average baseline for total prescribed units of SIMPONI ® for the quarters ending December 31, 2020, March 31, 2021 and June 30, 2021 was adjusted to approximately 28,750 prescribed units per quarter, subject to further adjustment under certain circumstances.

For the first and second quarter of 2021, we will be entitled to an amended quarterly tiered promotion fee ranging from $500 to $1,000 per prescription based on the incremental increase in total prescribed units of SIMPONI ® for that quarter over the predetermined baseline.

We refer to the Janssen Agreement, as amended in June 2020 and December 2020, as the Amended Janssen Agreement.

Pursuant to the Amended Janssen Agreement, for each of the first and second quarters of 2021, we will receive a minimum promotion fee of $0.3 million and the fee will be capped at 10% above the adjusted predetermined baseline.

We continued to receive a minimum promotion fee of $0.3 million and the fee was capped at 5% above the adjusted predetermined baseline for the quarter ended December 31, 2020.

The quarterly tiered promotion fee for the remaining term of the Amended Janssen Agreement beginning with the quarter ended September 30, 2021 will revert to the terms set forth in the Janssen Agreement prior to the amendment, with no minimum promotion fee and no cap on predetermined baseline units.

The Janssen Agreement expires on December 31, 2021, unless extended by us for an additional 12 months upon 180 days written notice prior to the end of the current term.

If we elect to extend the term, the predetermined baseline for 2022 will be subject to future agreement by us and Janssen.

Janssen can terminate the agreement at any time for any reason upon 30 days’ notice to us, and we can terminate the agreement for any reason at the end of any calendar quarter upon 30 days’ notice to Janssen.

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The agreement was amended in November 2018 to, among other things, include data from our AVISE ® Prognostic and AVISE ® HCQ testing products and extend the term of the agreement through December 31, 2019.

The agreement was further amended in November 2019 to, among other things, extend the term of the agreement through December 31, 2020.

The agreement was further amended in November 2019 and November 2020 to, among other things, extend the term of the agreement through December 31, 2020 and December 31, 2021, respectively.

Under the agreement, we are required to deliver weekly de-identified data files to GSK covering all data obtained from the performance of certain AVISE ® testing products, subject to applicable requirements under the Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, internal policy requirements and other applicable laws.

During the term of the agreement, the data we provide to GSK may not be provided, directly or through a third party, to any other pharmaceutical company that is marketing or developing a product for the treatment of SLE.

treatment of SLE.

GSK made a single upfront payment in exchange for the right to receive the applicable data files.

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In addition, GSK may terminate the agreement immediately if we become insolvent or for convenience upon 60 days’ prior written notice.

Master Services Agreement with Horizon Therapeutics

In August 2018, we entered into a master services agreement with Horizon Therapeutics, pursuant to which Horizon Therapeutics utilizes our AVISE ® MTX test to report on levels of MTXPG in patients undergoing methotrexate therapy in combination with its anti-gout product KRYSTEXXA ® in an ongoing Phase 4 clinical trial.

Under the agreement, Horizon Therapeutics paid an initial one time set-up cost and now pays an incremental fee for each specimen processed.

We provide, among other things, specimen collection kits, customized test requisition, pre-paid shipping, specimen storage and individual reports for each study subject.

Either party can terminate the agreement for convenience upon 30 days’ prior written notice to the other party.

Absent early termination, the agreement will run through August 2020.

Intellectual Property Overview

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CB-CAPs, red blood cell MTXPG exposure assessments, and anti-MCV antibodies.

The patent families which we believe are important for the protection of AVISE ® are summarized below in the section entitled “—License Agreements.” As of December 31, 2019, our portfolio primarily consisted of the following:

As of December 31, 2019, we are the exclusive licensee of five patent families related to CB-CAPs technology from the University of Pittsburgh, or UPitt.

The patent families which we believe are important for the protection of AVISE ® are summarized below in the section entitled “—License Agreements.” As of February 8, 2021, our portfolio primarily consisted of the following:

We are the exclusive licensee of five patent families related to CB-CAPs technology from the University of Pittsburgh, or UPitt.

We expect that these patent families (U.S.

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7,588,905 and 8,126,654 has issued in Japan (JP 4550051).

We also own one issued patent (US 10,132,813) and two pending patent application families that relate to our AVISE ® Lupus products.

We also own one issued patent (US 10,132,813), two pending U.S.

nonprovisional patent applications, a pending PCT application, and a pending U.S.

provisional application that relate to our AVISE ® Lupus products.

Foreign patents corresponding to US 10,132,813 have issued in Europe (EP 2,673,644) and Japan (JP 5,990,542) and Hong Kong (HK112316).

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The agreement requires that we diligently develop and commercialize products that are covered by the UPitt Patent Rights, and we have agreed to meet certain development and commercial milestones.

UPitt may terminate the

agreement if we fail to meet such milestones.

UPitt may terminate the agreement if we fail to meet such milestones.

In addition, if we fail to meet a milestone relating to development of the UPitt Patent Rights in the monitoring of organ transplantation and organ rejection field, UPitt may remove that field from our licensed rights.

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Pursuant to the agreement, we are obligated to use reasonable commercial efforts to undertake certain development activities with respect to products utilizing the Prometheus Patent Rights, including the completion of certain clinical studies.

In addition, in the event that we do not timely complete these

studies or approved substitute studies, we will become obligated to pay to Prometheus a one-time payment of $50,000.

In addition, in the event that we do not timely complete these studies or approved substitute studies, we will become obligated to pay to Prometheus a one-time payment of $50,000.

We are required to make a milestone payment of $2.0 million upon the achievement of certain net sales.

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In the event we sublicense any of the Prometheus Patent Rights, we are obligated to pay to Prometheus a fee based on a percentage of sublicense fees received by us, which percentage is in the mid-twenties.

In addition, we are also required to pay to Prometheus a percentage of the royalty payments we receive from our sublicensees, which may not be less than a certain low single-digit percentage of net sales of products or services sold by our sublicensees that utilize the sublicensed Prometheus Patent Rights, nor more than a certain mid-single digit percentage of such net sales.

In addition, we

are also required to pay to Prometheus a percentage of the royalty payments we receive from our sublicensees, which may not be less than a certain low single-digit percentage of net sales of products or services sold by our sublicensees that utilize the sublicensed Prometheus Patent Rights, nor more than a certain mid-single digit percentage of such net sales.

We may unilaterally terminate the agreement for any reason upon 60-days’ written notice to Prometheus.

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Future royalties under this arrangement are limited to the lesser of $1,200,000 (including the upfront payment of $100,000) or the total royalty earned through January 1, 2024.

Asset Purchase Agreement With Cellatope

In connection with the Cypress Purchase, we acquired an asset purchase agreement, dated February 2009 and amended December 2012 and again in January 2017, between Cypress and Cellatope Corporation, or Cellatope.

Pursuant to the amended agreement, we obtained assets related to our AVISE ® testing products.

In connection with

one launch of our AVISE ® SLE Monitor testing product, we paid an upfront payment of $100,000 and we are required to pay Cellatope a low-single digit royalty on net sales up to a maximum of $3.0 million.

Thierry Dervieux and De Novo Diagnostics, Inc.

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Clinical laboratory tests like AVISE ® CTD, AVISE ® SLE Prognostic and AVISE ® MTX are regulated under CLIA, as administered by CMS, as well as by applicable state laws.

In addition, the Federal Food, Drug and Cosmetic Act, or FDCA, defines a medical device to include any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals.

In addition, the Federal Food, Drug and Cosmetic Act, or

FDCA, defines a medical device to include any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals.

Our in vitro testing products are considered by the FDA to be subject to regulation as medical devices.

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In addition, the FDA regulates the export of medical devices manufactured in the United States to international markets.

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 for use only in that laboratory.

These tests are referred to as laboratory developed tests, or LDTs.

We believe that the AVISE ® CTD and AVISE ® MTX are LDTs, as are our near-term pipeline candidate tests.

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However, reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to regulation.

In recent years, FDA has stated its intention to modify its enforcement discretion policy with respect to LDTs.

Legislative and administrative proposals proposing to amend the FDA’s oversight of LDTs have been introduced in recent years and we expect that new legislative and administrative proposals will continue to be introduced from time to time.

It is possible that legislation could be enacted into law or regulations or guidance could be issued by the FDA which may result in new or increased regulatory requirements for us to continue to offer our LDTs or to develop and introduce new tests as LDTs.

For example, in recent years, FDA has stated its intention to modify its enforcement discretion policy with respect to LDTs.

For example, on July 31, 2014, the FDA notified Congress of its intent to modify, in a risk-based manner, its policy of enforcement discretion with respect to LDTs.

On October 3, 2014, the FDA issued two draft guidance documents entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs),” or the Framework Guidance, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs),” or the Reporting Guidance.

The Framework Guidance states that FDA intends to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the classification of medical devices generally in Classes I through III.

The FDA further states its intention in the Framework Guidance to publish general LDT classification guidance within 18 months of date on which the Framework Guidance is finalized.

The Reporting Guidance would further enable 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.

On November 18, 2016, the FDA announced that it would not finalize either guidance document.

On January 13, 2017, the 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 FDA has not issued any proposed rules or guidance documents relating to LDTs since January 2017.

However, the FDA could ultimately modify its current approach to LDTs in a way that would subject our products marketed as LDTs to the enforcement of regulatory requirements.

Moreover, legislative measures have recently been proposed in Congress that, if ultimately enacted, could provide the FDA with additional authority to require premarket review of and regulate LDTs.

The Framework Guidance stated that FDA intends to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the classification of medical devices generally in Classes I through III.

The Reporting 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.

On November 18, 2016, the FDA announced that it would not finalize either guidance document to allow for further public discussion on an appropriate oversight approach to LDTs and to give Congressional authorizing committees the opportunity to develop a legislative solution, and the FDA issued a discussion paper on possible approaches to LDT regulation in January 2017.

Moreover, in August 2020, the U.S.

Department of Health and Human Services announced that FDA will not require premarket review of LDTs absent notice-and-comment rulemaking, as opposed to through guidance documents and other informal issuances.

The FDA could ultimately modify its current approach to LDTs in a way that would subject LDTs to additional regulatory requirements.

Moreover, legislative measures have could likewise result in a change to the approach to FDA's regulation over LDTs, including a requirement for premarket review of LDTs, among other things.

Medical Device Regulatory Framework

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The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use.

The Investigational Device Process

In the U.S., absent certain limited exceptions, human clinical trials intended to support medical device clearance or approval require an IDE application.

Some types of studies deemed to present “non-significant risk” are deemed to have an approved IDE once certain requirements are addressed and IRB approval is obtained.

If the device presents a “significant risk” to human health, as defined by the FDA, the sponsor must submit an IDE application to the FDA and obtain IDE approval prior to commencing the human clinical trials.

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.

Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate IRBs at the clinical trial sites.

Submission of an IDE will note 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.

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 good clinical practice regulations 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.

The commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application, for numerous reasons, including, but not limited to, the following:

▪ the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;

▪ patients do not enroll in clinical trials at the rate expected;

▪ patients do not comply with trial protocols;

▪ patient follow-up is not at the rate expected;

▪ patients experience adverse events;

▪ patients die during a clinical trial, even though their death may not be related to the products that are evaluated during the trial;

▪ device malfunctions occur with unexpected frequency or potential adverse consequences;

▪ side effects or device malfunctions of similar products already in the market that change the FDA’s view toward approval of new or similar PMAs or result in the imposition of new requirements or testing;

▪ institutional review boards and third-party clinical investigators may delay or reject the trial protocol;

▪ third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, investigator agreement, investigational plan, good clinical practices, the IDE regulations or other FDA or IRB requirements;

▪ third-party investigators are disqualified by the FDA;

▪ we or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans, or otherwise fail to comply with the IDE regulations governing responsibilities, records and reports of sponsors of clinical investigations;

▪ third-party clinical investigators have significant financial interests related to us or our study such that the FDA deems the study results unreliable, or we or investigators fail to disclose such interests;

▪ regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;

▪ changes in government regulations or administrative actions;

▪ the interim or final results of the clinical trial are inconclusive or unfavorable as to safety or efficacy;

▪ the FDA concludes that our trial designs are unreliable or inadequate to demonstrate safety and efficacy.

The 510(k) Clearance Process

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The de novo classification process is an alternate pathway to classify medical devices that are automatically classified into Class III but which are low to moderate risk.

A manufacturer can submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device

presents a moderate or low risk.

A manufacturer can submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk.

De novo classification may also be available after receipt of a “not substantially equivalent” letter following submission of a 510(k) to FDA.

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The FDA can always review these letters to file in an inspection.

If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the modification of an existing 510(k)-cleared device, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is obtained.

FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the modification of an existing 510(k)-cleared device, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is obtained.

In addition, in these circumstances, the FDA can impose significant regulatory fines or penalties for failure to submit the requisite application(s).

Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products.

For example, in November 2018, FDA officials announced forthcoming steps that the FDA intends to take to modernize the premarket notification pathway under Section 510(k) of the FDCA.

For example, in November 2018, FDA officials announced steps that the FDA intended to take to modernize the premarket notification pathway under Section 510(k) of the FDCA.

Among other things, the FDA announced that it planned to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates.

These proposals included plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old.

In May 2019, the FDA solicited public feedback on these proposals.

The FDA requested public feedback on whether it should consider certain actions that might require new authority, such as whether to sunset certain older devices that were used as predicates under the 510(k) clearance pathway.

These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation.

More recently, in September 2019, the FDA finalized guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process.

The FDA intends to develop and maintain a list device types appropriate for the “safety and performance based” pathway and will continue to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the testing methods recommended in the guidance documents, where feasible.

These proposals have not yet been finalized or adopted, although the FDA may work with Congress to implement such proposals through legislation.

More recently, in September 2019, the FDA published revised final guidance describing an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway by showing that such device meets objective safety and performance criteria established by the FDA, thereby obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process.

The FDA maintains a list device types appropriate for the “safety and performance based” pathway and continues to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the recommended testing methods for such device types.

The PMA Approval Process

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The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Prior to approval of a PMA, the FDA may conduct inspections of the clinical trial data and clinical trial sites, as well as inspections of the manufacturing facility and processes.

Overall, the FDA review of a PMA application generally takes between one and three years, but may take significantly longer.

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 pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval;

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

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

Prior to approval of a PMA, the FDA may conduct inspections of the clinical trial data and clinical trial sites, as well as inspections of the manufacturing facility and processes to ensure compliance with the QSR.

PMA devices are also subject to the payment of user fees, and an annual establishment registration fee.

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.

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New PMA applications or PMA supplements are required for modification to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, 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.

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 post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or 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.

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New PMA applications or PMA supplements may also be required for modifications to any approved diagnostic tests, including modifications to our manufacturing processes, device labeling and device design, based on the findings of post-approval studies.

Clinical Trials

Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission.

All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators.

If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials.

A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject.

An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound.

The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin.

If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.

In addition, the study must be approved by, and conducted under the oversight of, an Institutional Review Board, or IRB, for each clinical site.

The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study.

If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA.

If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval from the FDA, but must still follow abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent, and labeling and record-keeping requirements.

Acceptance of an IDE application for review does not guarantee that the FDA will allow the IDE to become effective and, if it does become effective, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials.

An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.

During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them.

The clinical investigators in the clinical study are also subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and recordkeeping requirements.

Additionally, after a trial begins, the sponsor, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.

Post-market Regulation

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply.

These include:

• establishment registration and device listing with the FDA;

• QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

• labeling regulations and FDA prohibitions against the promotion of investigational products, or the promotion of ‘‘off-label’’ uses of cleared or approved products;

• requirements related to promotional activities;

• clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices, or approval of certain modifications to PMA-approved devices;

• medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;

• correction, removal and recall 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 FDCA that may present a risk to health;

• the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations;

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

Device manufacturing processes are required to comply with the applicable portions of 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.

As a manufacturer, will be subject to periodic scheduled or unscheduled inspections by the FDA.

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 any marketed medical device 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 off-label by a physician in the practice of medicine, could result in restrictions on a medical device, including the removal of the product from the market or voluntary or mandatory device recalls.

The FDA has broad regulatory compliance and enforcement powers.

If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:

• warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;

• recalls, withdrawals, or administrative detention or seizure of our products;

• operating restrictions or partial suspension or total shutdown of production;

• refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;

• withdrawing 510(k) clearances or PMA approvals that have already been granted;

• refusal to grant export approvals;

• criminal prosecution.

Federal and State Physician Self-Referral Prohibitions

We are subject to the federal physician self-referral prohibitions, commonly known as the Stark Law, and to similar state law restrictions, such as California’s Physician Ownership and Referral Act, or PORA, and other comparable state laws.

Together these restrictions generally prohibit us from billing a patient or any governmental or private payer for certain designated health services, including clinical laboratory services, when the physician ordering the service, or any member of such physician’s immediate family, has a financial interest, such as an ownership or investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition.

Together these restrictions generally prohibit us from billing a patient or any governmental or private payor for certain designated health services, including clinical laboratory services, when the physician ordering the service, or any member of such physician’s immediate family, has a financial interest, such as an ownership or investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition.

Sanctions for a Stark Law violation include the following:

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Additionally, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Although the Anti-kickback Statute applies only to items and services reimbursable under any federal health care program, a number of states, including California, have passed statutes substantially similar to the Anti-kickback Statute that apply to all third-party payers, including commercial insurers, and in some states, to patients without insurance.

Although the Anti-kickback Statute applies only to items and services reimbursable under any federal health care program, a number of states, including California, have passed statutes substantially similar to the Anti-kickback Statute that apply to all third-party payors, including commercial insurers, and in some states, to patients without insurance.

The California Attorney General and courts have interpreted the California anti-kickback and fee-splitting laws in substantially the same way as HHS and the courts have interpreted the Anti-kickback Statute.

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Because the 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 intervenes and is ultimately successful in obtaining redress in the matter or if the plaintiff succeeds in obtaining redress without the government’s involvement, then the plaintiff will receive a percentage of the recovery.

will receive a percentage of the recovery.

Finally, the Social Security Act includes its own provisions that prohibit the filing of false claims or submitting false statements in order to obtain payment.

Violation of these provisions may result in fines, imprisonment or both, and possible exclusion from Medicare or Medicaid programs.

Several states, including California, have enacted comparable false claims laws which may be broader in scope and may apply regardless of payer.

Several states, including California, have enacted comparable false claims laws which may be broader in scope and may apply regardless of payor.

The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

A person who offers or provides to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be liable for significant civil monetary penalties for each wrongful act and up to three times the amount

improperly claimed.

Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the Anti-Kickback Statute and False Claims Act.

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The Office of Inspector General of HHS, or OIG, emphasizes, however, that this exception should only be used occasionally to address special financial needs of a particular patient.

Although this prohibition applies only to federal healthcare program beneficiaries, applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud, may also be implicated for similar practices offered to patients covered by commercial payers.

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

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

Like the Anti-kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

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business entity from offering or providing, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether or not such conduct violates local laws.

In addition, it is illegal for a company that reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls.

In addition, it is illegal for a company that

reports to the SEC to have false or inaccurate books or records or to fail to maintain a system of internal accounting controls.

We will also be required to maintain accurate information and control over sales and distributors’ activities that may fall within the purview of the FCPA, including its books and records provisions and its anti-bribery provisions.

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Privacy and Security Laws

Health Insurance Portability and Accountability Act;

California Consumer Privacy Act of 2018, or the CCPA

Under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, HHS has issued regulations to protect the privacy and security of protected health information used or disclosed by certain entities including health care providers, such as us.

Data Privacy and Security Laws

Under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, HHS has issued regulations to protect the privacy and security of protected health information, or PHI, used or disclosed by certain entities including health care providers, such as us.

HIPAA also regulates standardization of data content, codes and formats used in certain health care transactions and standardization of identifiers for health plans and providers.

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It also tasks HHS with establishing a methodology whereby harmed individuals who were the victims of breaches of unsecured PHI may receive a percentage of the civil monetary penalty paid by the violator.

Even when HIPAA does not apply, according to the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair 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.

The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA security regulations.

In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which 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.

In addition, certain state laws govern the privacy and security of health-related and other personal information in certain circumstances, some of which are more stringent than HIPAA and many of which 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

The State of California, for example, recently adopted the California Consumer Privacy Act of 2018, or the CCPA, which went into effect January 1, 2020.

The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the United States because it mirrors a number of the key provisions of the European Union General Data Protection Regulation, or the GDPR, (discussed below).

The CCPA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information.

The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information.

It also creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information.

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.

Although the law includes limited exceptions, including for “protected health information” maintained by a covered entity or business associate, it may regulate or impact our processing of personal information depending on the context.

Although the law includes limited exceptions, including for PHI maintained by a covered entity or business associate, it may regulate or impact our processing of personal information depending on the context.

Further, the California Privacy Rights Act, or CPRA, recently passed in California.

The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data.

It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement.

The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and potential business process changes may be required.

GDPR and Foreign Laws

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The interpretation, application and interplay of consumer and health-related data protection laws in the U.S., Europe and elsewhere are often uncertain, contradictory and in flux.

In Europe, the European Union enacted Regulation (EU) 2016/679 (General Data Protection Regulation, or GDPR), has been enacted in the European Union and went into full effect in May 2018.

In Europe, the General Data Protection Regulation, or GDPR, went into full effect in May 2018.

The GDPR implements stringent operational requirements for processors and controllers of personal data, including, for example, expanded disclosures about how personal information is collected and used, limitations on retention of information, increased requirements pertaining to health data and pseudonymised (i.e., key-coded) data, mandatory data breach notification requirements, more robust rights for individuals in regard to their personal data and higher standards for controllers to demonstrate that they have obtained valid consent for certain data processing activities.

The GDPR provides that European Union and European Economic Area or EEA Member States may make their own further laws and regulations, which may impose further limitations, including in relation to the processing of biometric or health data, which may result in differences between Member State laws, limit our ability to use and share personal data, cause our costs to increase, and/or harm our business and/or financial condition.

Additionally, following the United Kingdom’s withdrawal from the European Union, we will have to comply with the GDPR and the United Kingdom GDPR, each regime having the ability to fine up to the greater of €20 million/ £17.5 million or 4% of global turnover.

The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction, which exposes us to further compliance risk.

It provides that European Union, or EU, and European Economic Area, or EEA, member states may make their own further laws and regulations, which may impose further limitations, including in relation to the processing of biometric or health data, which may result in differences between member state laws, limit our ability to use and share personal data, cause our costs to increase, and/or harm our business and/or financial condition.

Among other requirements, the GDPR also regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection to such personal data, including the United States, and the efficacy and longevity of current transfer mechanisms between the European Union, or EU, and the United States remains uncertain.

For example, in 2016, the EU and United States agreed to a transfer framework for data transferred from the EU to the United States, called the Privacy Shield, but the Privacy Shield was invalidated in July 2020 by the Court of Justice of the European Union.

Further, from January 1, 2021, companies have to comply with the GDPR and also the United Kingdom GDPR, or UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law.

The UK GDPR mirrors the fines under the GDPR, e.g.

fines up to the greater of €20 million (£17.5 million) or 4% of global turnover.

The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, and it is unclear how United Kingdom data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term.

Currently there is a four to six-month grace period agreed in the EU and United Kingdom Trade and Cooperation Agreement, ending June 30, 2021 at the latest, whilst the parties discuss an adequacy decision.

However, it is not clear whether (and when) an adequacy decision may be granted by the European Commission enabling data transfers from EU member states to the United Kingdom long term without additional measures.

These changes may lead to additional costs and increase our overall risk exposure.

Billing and Government Reimbursement for Clinical Laboratory Services

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In April 2014, Congress passed the Protecting Access to Medicare Act, or PAMA, which included substantial changes to the way in which clinical laboratory services will be paid under Medicare.

Under PAMA, laboratories that receive the majority of their Medicare revenue from payments made under the CLFS 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”), private payer payment rates and volumes for their tests.

Under PAMA, laboratories that receive the majority of their Medicare revenue from payments made under the CLFS 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”), private payor payment rates and volumes for their tests.

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

As required under PAMA, CMS uses the rates and volumes reported by laboratories to develop Medicare payment rates for laboratory tests equal to the volume-weighted median of the private payer payment rates for the tests.

On June 23, 2016, CMS published the final rule implementing the reporting and rate-setting requirements under PAMA.

For tests furnished on or after January 1, 2018, Medicare payments for clinical diagnostic laboratory tests are based upon these reported private payer rates.

For tests furnished on or after January 1, 2018, Medicare payments for clinical diagnostic laboratory tests are based upon these reported private payor rates.

For clinical diagnostic laboratory tests that are assigned a new or substantially revised CPT code, initial payment rates will be assigned by the gap-fill methodology, as under prior law.

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Any reductions to payment rates resulting from the new methodology are limited to 10% per test per year in each of the years 2018 through 2020 and to 15% per test per year in each of the years 2021 through 2023.

PAMA’s impact on Medicare reimbursement for AVISE ® CTD in 2019 was a reduction of 10.1% and is expected to be a 7.3% reduction in 2020.

At the beginning of 2020, PAMA’s impact on Medicare reimbursement for AVISE ® CTD was a reduction of 7.3% compared to levels experienced in 2019.

Effective March 2020, as a result of our change in the composition of our AVISE ® CTD test, PAMA's impact on Medicare reimbursement for AVISE ® CTD was a reduction of 5.3% compared to levels experienced in 2019.

We do not expect PAMA to impact Medicare reimbursement for AVISE ® CTD in 2021 compared to levels experienced in 2020.

The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, signed into law on March 27, 2020 provides clinical laboratories a one-year reprieve from reporting requirements under the Protecting Access to Medicare Act, as well as a one-year delay of rate cuts scheduled to take place next year.

Reporting was not required between January 1, 2020 to December 31, 2020.

Instead, it is required between January 1, 2022 and March 31, 2022.

Additionally, the next round of rate cuts was pushed from 2021 to 2022, with tests receiving cuts of up to 15% a year from 2022 through 2024.

PAMA also authorizes the adoption of new, temporary billing codes and unique test identifiers for FDA-cleared or approved tests, as well as advanced diagnostic laboratory tests.

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Billing for diagnostic testing can be complicated.

Depending on the billing arrangement and applicable law, we must bill various payers, such as insurance companies, Medicare, Medicaid, physicians, hospitals, employer groups and

patients, all of which have different billing requirements.

Depending on the billing arrangement and applicable law, we must bill various payors, such as insurance companies, Medicare, Medicaid, physicians, hospitals, employer groups and patients, all of which have different billing requirements.

Additionally, compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further complexity to the billing process.

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The ACA made a number of substantial changes to the way healthcare is financed by governmental and private insurers.

For example, the ACA requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices.

The medical device tax has been suspended until December 31, 2019, but is scheduled to return beginning in 2020.

It is unclear at this time when, or if, the provision of our LDTs will trigger the medical device tax if the FDA ends its policy of general enforcement discretion and regulates certain LDTs as medical devices, and it is possible that this tax will apply to some or all of our existing testing products or testing products we may develop in the future.

The ACA also contains a number of other provisions, including provisions governing enrollment in federal and state healthcare programs, reimbursement matters and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict.

The ACA, among other things, included provisions governing enrollment in federal and state healthcare programs, reimbursement matters and fraud and abuse, which we expect will impact our industry and our operations in ways that we cannot currently predict.

Additionally, on December 14, 2018, a U.S.

District Court Judge in the Northern District of Texas, or Texas District Court Judge, ruled that the entire ACA is invalid based primarily on the fact that the Tax Cuts and Jobs Act of 2017 repealed the tax-based shared responsibility payment imposed by the ACA, on certain individuals who fail to maintain qualifying health coverage for all or part of a year, which is commonly referred to as the “individual mandate”.

health coverage for all or part of a year, which is commonly referred to as the “individual mandate”.

On December 18, 2019, the U.S.

Court of Appeals for the 5th Circuit upheld the district court’s decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well.

It is unclear how these decisions, subsequent appeals, or other efforts to challenge, repeal or replace the ACA will impact the ACA.

Additional state and federal health care reform measures may be adopted in the future, any of which could have a material adverse effect on the clinical laboratory industry.

As of December 31, 2019, we had 153 full-time employees, and 3 temporary employees.

These included 31 in laboratory operations, seven in research and development, 63 in sales and marketing and 52 in general and administrative functions.

Supreme Court is currently reviewing the case, although it is unclear how the Supreme Court will rule.

It is also unclear how other efforts, if any, to challenge, repeal or replace the ACA will impact the ACA.

Other legislative changes have been proposed and adopted since the ACA was enacted.

These changes include aggregate reductions to Medicare payments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which went into effect on April 1, 2013, and due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2021, unless additional Congressional action is taken.

The American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Additional state and federal health care reform measures may also be adopted in the future, any of which could have a material adverse effect on the clinical laboratory industry.

Human Capital

As of December 31, 2020, we had 181 full-time employees, and 2 part-time employees in the United States.

These included 35 in laboratory operations, 12 in research and development, 71 in sales and marketing and 63 in general and administrative functions.

None of our employees is represented by a labor union or covered by a collective bargaining agreement.

We consider our relationship with our employees to be good.

We recognize that attracting, motivating and retaining talent at all levels is vital to our continued success.

Our employees are a significant asset and we aim to create an equitable, inclusive and empowering environment in which our employees can grow and advance their careers, with the overall goal of developing, expanding and retaining our workforce to support our current pipeline and future business goals.

By focusing on employee retention and engagement, we also improve our ability to support our business and operations, our pipeline, and also protect the long-term interests of our securityholders.

Our success also depends on our ability to attract, engage and retain a diverse group of employees.

Our efforts to recruit and retain a diverse and passionate workforce include providing competitive compensation and benefits packages and ensuring we listen to our employees.

We value innovation, passion, data-driven decision making, persistence and honesty, and are building a diverse environment where our employees can thrive and be inspired to make exceptional contributions to bring novel testing products to patients.

Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, motivating and integrating our existing and future employees.

The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees and directors through grants of stock-based compensation awards and payments of cash-based performance bonus awards, in order to increase stockholder value and the success of our company by motivating our employees to perform to the best of their abilities and achieve our objectives.

We are committed to providing a competitive and comprehensive benefits package to our employees.

Our benefits package provides a balance of protection along with the flexibility to meet the individual health and wellness needs of our employees.

We plan to continue to refine our efforts related to optimizing our use of human capital as we grow, including improvements in the way we hire, develop, motivate and retain employees.

We rely on sole suppliers for the critical supply of reagents, equipment and other materials that we use to perform the tests that comprise our AVISE ® testing products.

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We manage our operations and allocate resources as a single reporting segment.

Financial information regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2019 and 2018 and

our total assets as of December 31, 2019 and 2018, is included in our Financial Statements in Item 8 of this Annual Report.

Financial information regarding our operations, assets and liabilities, including our net loss for the years ended December 31, 2020 and 2019 and our total assets as of December 31, 2020 and 2019, is included in our Financial Statements in Item 8 of this Annual Report.

Corporate Information

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In January 2019, we changed our name to Exagen Inc.

Our principal executive offices are located at 1261 Liberty Way, Suite C, Vista, California 92081.

Our principal executive offices are located at 1261 Liberty Way, Vista, California 92081.

Our telephone number is (760) 560-1501.

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What changed 10-K

Item 1. Business