cstl-20201231

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2020

For the transition period from _________ to _________

Commission File Number: 001-38984

CASTLE BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

820 S. Friendswood Drive, Suite 201, Friendswood, Texas 77546

(Address of principal executive offices) (Zip Code)

(866) 788-9007

(Registrant’s telephone number, including area code)

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

Title of each class Trading Symbol(s) Name of each exchange on which registered

Common Stock, $0.001 par value per share CSTL The Nasdaq Global Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ̈

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ̈No ☒

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

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

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

Large accelerated filer ̈ Accelerated filer ̈

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☒

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was $518.9 million based on the closing price of the registrant’s common stock on June 30, 2020, as reported by the Nasdaq Global Market.

As of March 5, 2021, there were 24,978,424 shares of common stock, $0.001 par value per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission, or SEC, subsequent to the date hereof pursuant to Regulation 14A in connection with the registrant’s 2021 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on Form 10-K. We intend to file such proxy statement with the SEC not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2020.

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Page

Special Note Regarding Forward-Looking Statements 2

Risk Factors Summary 3

PART I. 5

Item 1. Business 5

Item 1A. Risk Factors 34

Item 1B. Unresolved Staff Comments 72

Item 2. Properties 72

Item 3. Legal Proceedings 72

Item 4. Mine Safety Disclosures 72

PART II. 73

Item 6. Selected Financial Data 74

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 88

Item 8. Financial Statements and Supplementary Data 88

Item 9A Controls and Procedures 89

Item 9B. Other Information 89

PART III. 90

Item 10. Directors, Executive Officers and Corporate Governance 90

Item 11. Executive Compensation 90

Item 14. Principal Accountant Fees and Services 90

PART IV. 91

Item 15. Exhibits, Financial Statement Schedules 91

SIGNATURES 94

INDEX TO FINANCIAL STATEMENTS F-1

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

•estimates of our addressable market, future revenue, expenses, capital requirements and our needs for additional financing;

•expectations with respect to reimbursement for our products, including third-party payor reimbursement and coverage decisions;

•anticipated cost, timing and success of our products in development, and our plans to research, develop and commercialize new tests;

•the impact of the COVID-19 pandemic on our business;

•our ability to obtain funding for our operations, including funding necessary to complete the expansion of our operations and development of our product candidates;

•the implementation of our business model and strategic plans for our products, technologies and businesses;

•our ability to manage and grow our business by expanding our sales to existing customers or introducing our products to new customers;

•our ability to develop and maintain sales and marketing capabilities;

•regulatory developments in the United States and foreign countries;

•the performance of our third-party suppliers;

•the success of competing diagnostic products that are or become available;

•our ability to attract and retain key personnel;

•our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act, as amended, or the JOBS Act, enacted in April 2012; and

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

In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes. These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Annual Report on Form 10-K and are subject to risks and uncertainties. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. We discuss many of the risks associated with the forward-looking statements in this Annual Report on Form 10-K in greater detail under the heading “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

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RISK FACTORS SUMMARY

We face many risks and uncertainties, as more fully described in this Annual Report on Form 10-K under the heading “Risk Factors.” Some of these risks and uncertainties are summarized below. The summary below does not contain all of the information that may be important to you, and you should read this summary together with the more detailed discussion of these risks and uncertainties contained in “Risk Factors.”

Risk Related to our Financial Condition

•We rely upon a small number of third-party payors for a significant portion of our revenue.

•Our method of recognizing revenue may not reflect our underlying business.

•We have incurred significant losses since inception, and we may never achieve profitability.

•We are an early, commercial-stage company and have a limited operating history, which may make it difficult to evaluate our current business and predict our future performance.

•Our financial results could fluctuate in the future, causing the market price of our stock to decline substantially.

•If our internal control over financial reporting is ineffective, we may not be able to accurately report our financial results or file our periodic reports in a timely manner.

•We may need to raise additional capital to commercialize new products, to expand operations or to fund existing operations.

Risks Related to our Business

•We have been, and may continue to be, adversely impacted by the COVID-19 pandemic, which has caused decreased test report volume.

•Our revenue heavily relies upon the sale of a single product and our current or future products may not achieve or maintain significant commercial market acceptance.

•Billing for our products is complex and we require substantial time and resources to collect payment.

•We rely on third parties for tumor sample collection, preparation and delivery.

•A depletion or loss of our tumor sample database could significantly harm our business.

•If our primary clinical laboratory facility becomes damaged or inoperable or we are required to vacate our existing facility, our ability to conduct our laboratory analysis and pursue our research and development efforts may be jeopardized.

•Our current or future products may not achieve or maintain significant commercial market acceptance.

•New product development is lengthy and complex and our revenues could be limited if we are unable to increase and support adoption of our products by healthcare providers.

•We may experience limits on our revenue if we are unable to increase and support adoption of our products by both physicians and other healthcare providers.

•We rely on limited or sole suppliers for some of the reagents, equipment, chips and other materials used by our products, and we may not be able to find replacements or transition to alternative suppliers.

•The sizes of the markets for our current and future products have not been established with precision and may be smaller than we estimate.

•The diagnostic testing industry is subject to rapid change, which could make our current or future products obsolete.

Risks Related to Reimbursement and Government Regulation

•We currently have limited reimbursement coverage for our lead product, DecisionDx-Melanoma, and if third-party payors, including government and commercial payors, do not provide sufficient coverage of, or adequate reimbursement for, our products, our commercial success, including revenue, will be negatively affected.

•We conduct business in a heavily regulated industry and failure to comply with regulatory requirements, including those established by the Centers for Medicare & Medicaid Services, or CMS, and the U.S. Food and Drug Administration, or FDA, or changes in enforcement discretion for laboratory developed tests could harm our business.

•Data from our clinical studies may change materially, which could harm our business.

•Changes in health care policy or healthcare statutes and regulations or our ability to comply with applicable requirements could cause a material adverse effect to our business and operations.

Risks Related to Intellectual Property

•If we are unable to obtain and maintain sufficient intellectual property protection for our technology, our ability to successfully commercialize our products may be impaired.

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•Our commercial success depends significantly on our ability to operate without infringing upon the intellectual property rights of third parties.

•We rely on information technology systems that we license from third parties and other royalty-bearing license agreements.

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

•We are highly dependent on the services of our key personnel, including our President and Chief Executive Officer.

•Our employees and any current or potential commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

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

•Our business may be negatively impacted by cyber security threats, natural disasters and public health crises.

•Product or professional liability lawsuits against us could cause us to incur substantial liabilities and could limit our commercialization of our products.

Risks Related to Ownership of Our Common Stock.

•The stock price of our common stock may be volatile or may decline regardless of our operating performance, and you may lose all or part of your investment.

•We have broad discretion in the use of working capital and may not use it effectively or in ways that increase our share price.

•The concentration of our stock ownership will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

•Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.

•Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

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PART I

Item 1. Business.

As used in this Annual Report on Form 10-K, unless the context indicates or otherwise requires, “Castle Biosciences,” “the Company,” “we,” “us,” and “our” refer to Castle Biosciences, Inc., a Delaware Corporation.

Overview

We are a commercial-stage dermatological cancer company focused on providing physicians and their patients with personalized, clinically actionable genomic information to make more accurate treatment decisions. We believe that the traditional approach to developing a treatment plan for certain cancers using clinical and pathology factors alone is inadequate and can be improved by incorporating personalized genomic information. Our non-invasive products utilize proprietary algorithms to provide an assessment of a patient’s specific risk of metastasis or recurrence of their cancer, allowing physicians to identify patients who are likely to benefit from an escalation of care as well as those who may avoid unnecessary medical and surgical interventions. Our lead product, DecisionDx®-Melanoma, is a proprietary multi-gene expression profile, or GEP, test that predicts the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma, a deadly skin cancer. This test has two current clinically actionable uses. The first use immediately following diagnosis predicts a patient’s likelihood of having a sentinel lymph node negative biopsy result so that physicians and patients can discuss the risk and benefit of undergoing sentinel lymph node biopsy, or SLNB, surgery. The second use is to inform the appropriate treatment plan, regardless of the decision to undergo or avoid the SLNB surgery. We estimate more than 130,000 patients are diagnosed with invasive cutaneous melanoma each year in the United States. We launched DecisionDx-Melanoma in May 2013.

On August 31, 2020, we commercially launched our cutaneous squamous cell carcinoma, or SCC, proprietary GEP test, DecisionDx®‐SCC, and on November 2, 2020, we commercially launched our proprietary GEP test for suspicious pigmented lesions, DecisionDx® DiffDxTM-Melanoma. These two indications are areas of high clinical need in dermatological cancer and, together, represent an addressable population of approximately 500,000 patients in the United States.

We also market DecisionDx®-UM, which is a proprietary GEP test that predicts the risk of metastasis for patients with uveal melanoma, a rare eye cancer. We launched DecisionDx-UM in January 2010.

Based on the substantial clinical evidence that we have developed, we have received Medicare coverage for DecisionDx-Melanoma and DecisionDx-UM, representing approximately 50% of the addressable patient population for both of these tests.

We have processed over 70,000 clinical samples since our inception. Our revenue for the year ended December 31, 2020 was $62.6 million, compared to $51.9 million for 2019 and $22.8 million for 2018.

Information on our test report volumes by year is presented below:

Years Ended December 31,

DecisionDx‐SCC 485 — — —

DecisionDx DiffDx-Melanoma 73 — — —

Our Competitive Advantages

We are focused on providing actionable genomic information to physicians and their patients. We believe our key competitive advantages are due in part to the following factors:

•Development of our products required our machine learning expertise, artificial intelligence and our proprietary algorithms, which are complex and difficult to replicate. We develop our products using our machine-learning expertise and artificial intelligence to analyze clinical specimens with associated long-term outcomes data to identify genomic patterns in tumor biology that we believe will accurately predict the risk of metastasis and recurrence. We then validate these genomic patterns, by refining and locking down algorithms to enable additional studies to validate the accuracy of our tests and subsequently document the clinically actionable changes made by physicians when they incorporate our test results into their treatment plan decisions.

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•We have demonstrated the ability to provide clinically actionable information despite the complex genomics of skin cancer. In the diagnosis and prognosis of cancer, there is significant current interest in DNA driver mutations as being a predictor of the behavior of cancers. We believe that while the behavior of some cancers may be elucidated by DNA analysis and the response to certain targeted therapies, the majority of skin cancer behavior will best be understood at the gene expression level. Specifically, while DNA mutations of a specific gene are important for tumor behavior, the impact of other genes, epigenetic changes to the gene and the non-tumor environment which cannot be discerned by the mutation that a gene carries are critical to the understanding of tumor behavior. We believe that focusing on the expression of the gene or how the gene behaves will be more accurate than the mutation of the gene itself.

•Our growing repository of tumor samples and associated data, some including long-term outcomes, positions us well for improvement of current products and accelerated development of new ones. The development and validation of accurate tests is a complex process that requires access to tumor tissue specimens and long-term outcomes data. Such material and associated data is not readily available for skin cancer, which creates a barrier to rapid test development and validation. However, over the last decade we have accrued a sample bank comprised of approximately 60,000 samples, including 6,000 well-annotated samples that we have used in our clinical studies to date. We have been able to use this sample bank to expand the clinical use of our products, evaluate improvements in new and existing proprietary genomic algorithm approaches and develop new products. In addition to these historical uses, we are exploring other opportunities involving the use of these data.

•We have generated, and will continue to generate, robust clinical validity and utility data supporting the use of our products. For example, DecisionDx-Melanoma has been studied in more than 5,700 patient samples, including 28 published studies since 2015. We also are making significant investments in further clinical studies to continue to support DecisionDx-Melanoma, DecisionDx-UM, DecisionDx-SCC and DecisionDx DiffDx-Melanoma. This growing set of data is significant in educating physicians and patients about the value of our products and supporting reimbursement of our products by third-party payors.

•We have established relationships with physicians that allow us to optimize our interactions, increase adoption of our current products and identify areas of unmet clinical need to efficiently launch additional products. We have published rigorous clinical data, which allows our sales and medical affairs representatives to have substantive, in depth dialogues with physicians. Through these established relationships, we have been able to integrate our products into physicians’ workflows and identify further educational programs, which we believe fosters adoption of our products. We can also leverage these relationships to identify areas of significant unmet medical need and efficiently launch additional dermatologic products.

•We have experience in navigating the reimbursement landscape. In the molecular diagnostics industry securing reimbursement for new tests is a long, complex and uncertain process. We have developed significant expertise to assist in securing reimbursement for our products.

Our Strategy

We intend to build upon our position as a leading provider of genomic information for dermatological cancers. To realize this objective, we plan to:

•Expand adoption of our currently marketed products and educate physicians and their patients on the need for our products to make a more informed treatment plan decision. We believe that cancer treatment plans will be most effective if decisions are personalized for each patient based on the biology of their specific tumor, instead of a one-size-fits-all approach. We will continue to educate physicians and their patients on the diagnostic discordance that leads to over- and under-treatment.

•Continue to generate evidence supporting the clinical utility and validity of our products. We have conducted extensive clinical utility and validity studies to support the adoption of, and reimbursement for, our products. In order to maintain our competitive advantage and increase sales of our products, we will continue to generate additional clinical data to support the use of our products.

•Execute planned expansion of our commercial channel. We plan to increase sales of our products by adding new physicians to our customer base as well as increasing orders by physicians already using our products. We increased the number of sales and medical affairs representatives in the first quarter of 2019 with a second expansion occurring in December 2019. Further, we expanded our sales organization headcount in the third quarter of 2020 in preparation for the commercial launch of our DecisionDx DiffDx-Melanoma test. We are planning additional expansion in the first half of 2021. We will continue to evaluate the needs of our customers and may make additional commercial investments to better support the educational needs of our customers with our currently marketed products as well as support the launch of additional products.

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•Expand coverage and reimbursement for our products. We plan to further increase dialogue with third-party payors to highlight our clinical utility and patient outcomes data. We believe these data will validate the benefit of our products for patients and will persuade more third-party payors to provide coverage and reimbursement. Additionally, we will continue to emphasize our ability to reduce overall cost to the healthcare system by appropriately classifying high-risk patients and removing the need for unnecessary invasive products and procedures for low-risk patients.

•Utilize our development expertise and commercial channel insight to provide additional solutions. We are continuing to develop products that address the challenges facing physicians. We have initiated work on a number of pipeline tests which branch out upstream, downstream and parallel to our currently marketed tests. Although we are still in the early stages of development, we believe we could launch three to five new tests by the end of 2025, utilizing our existing sales channels, potentially adding approximately $3.6 billion to our current U.S. total addressable market, or TAM. We expect to provide additional details on these pipeline products before the end of 2021.

Dermatologic Cancer Market Overview

Skin cancer is the uncontrolled growth of abnormal skin cells. There are six types of pre-cancers and skin cancers that result in a total annual incidence of 5.5 million patients. The three most common forms of skin cancers are basal cell carcinomas, SCC and cutaneous melanoma. SCC, the second most common form of skin cancer, is an uncontrolled growth of abnormal cells arising from the squamous cells in the epidermis, the skin’s outermost layer. Melanoma, an aggressive form of skin cancer, originates in the pigment-producing melanocytes in the basal layer of the epidermis. We do not, at this time, have an active focus on basal cell carcinomas.

Pre-cancers include suspicious pigmented lesions, which are unusual-looking lesions that may be melanoma, and actinic keratosis, also known as a solar keratosis.

1.U.S. TAM = Total addressable market based on estimated patient population assuming average reimbursement rate among all payors.

2.Annual U.S. incidence for Stage I, II or III melanoma estimated at 130,000; Annual U.S. incidence for squamous cell carcinoma estimated at 1,000,000 with addressable market limited to carcinomas with one or more high risk features; Annual U.S. incidence for suspicious pigmented lesion biopsies estimated at 2,000,000 with addressable market limited to the 15% with an indeterminant biopsy.

3.Clinicians who ordered DecisionDx-Melanoma in last twelve months (as of 12/31/2020)

4.Pathologists who provided clinical specimens for DecisionDx-Melanoma in last twelve months (as of 12/31/2020)

MCR = Medicare. MCRA = Medicare Advantage; current customer estimates based on last twelve months.

Cutaneous Melanoma

Melanoma tumors originate in the pigment-producing melanocytes in the basal layer of the epidermis. Approximately half of all melanomas are diagnosed prior to expanding into the dermis and are classified as in situ or non-invasive melanomas and DecisionDx-Melanoma is not used in this population. Worldwide statistics suggest that there were nearly 300,000 new cases of melanoma diagnosed worldwide with the U.S. Surveillance, Epidemiology, and End Results, or SEER, database estimating that approximately 96,000 invasive cutaneous melanomas are diagnosed in the United States annually. However, multiple publications show that diagnosis of melanoma is underreported by between 30% and 72%. Using the mean of the underreporting of these four studies, we estimate the annual incidence to be 130,000, representing an estimated U.S. TAM of $540 million. According to these publications, underreporting reflects the fact that the majority of diagnoses are made by community-based dermatologists and dermatopathologists rather than institutional-based specialists who more typically have tumor registry support. Based on currently available data, we estimate the targetable clinician base is between 11,000 and 15,000.

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Additionally, the incidence of melanoma has steadily increased annually over the last several decades, with an estimated growth in the United States of more than 50% during the past ten years.

After a diagnosis of invasive cutaneous melanoma, healthcare providers have traditionally used clinical and pathology factors from the initial biopsy to estimate the patient’s risk of metastasis. This estimation process, or staging, is used to determine nearly all treatment decisions. Invasive melanoma is staged as Stage I through Stage IV. Tumors characterized as Stage I have invaded the dermis but are thin, with less than or equal to 2.0 mm invasion into the dermis if not ulcerated or less than or equal to 1.0 mm invasion into the dermis if ulcerated. Stage I tumors have the lowest population risk of metastasis and death from melanoma. Stage II tumors, though localized, are thicker than 2.0 mm if not ulcerated or greater than 1.0 mm if ulcerated. Stage III tumors have evidence of regional metastasis, such as palpable metastasis at the regional lymph node basin, in-transit or satellite disease, or melanoma cell(s) in the SLN but without evidence of distant metastatic spread. Stage IV tumors are those in which distant metastasis, such as to the lung or brain, has been detected.

All patients who are diagnosed with an invasive cutaneous melanoma will undergo a wide local excision procedure with the surgical margins determined by the depth of the tumor. The invasive SLNB surgery is recommended to be considered for patients with melanomas greater than or equal to 0.8 mm thick or thinner melanomas in the presence of an adverse pathologic feature such as the presence of ulceration, high mitotic rate, and transected base. It is believed that tumors with these anatomic based features have a likelihood of an SLN-positive biopsy result 5% or more of the time. If the SLNB surgery is performed, then the wide local excision is performed at that time. As noted in the prior paragraph, an SLN-positive biopsy result, meaning that at least one melanoma cell was seen in the SLN tissue, leads to re-staging the patient as Stage III. Guideline committees do not recommend an SLNB if the likelihood of a positive SLN result is <5%. They recommend discussion and considering an SLNB if the likelihood of a positive SLN falls between 5% and 10% and recommend discussing and offering an SLNB if the likelihood is >10%. Guideline committees have selected the 5% threshold due to a reported regional false negative rate of the SLNB surgery at 5% (meaning that 5% of the time, or more, the guideline committees expect a patient with an SLN-negative biopsy result will subsequently develop lymph node metastasis). However, the published literature documents a median regional false negative rate of 18% and an 11% surgical complication rate.

Cutaneous Squamous Cell Carcinoma

Cutaneous squamous cell carcinoma, the second most common form of skin cancer, is an uncontrolled growth of abnormal cells arising from the squamous cells in the epidermis, the skin’s outermost layer. Approximately one million patients are diagnosed with SCC each year in the United States. Worldwide data on SCC is inconsistently reported but the incidence outside the United States is estimated to be greater than two million diagnoses annually.

Historically, SCC has been classified as one of the “non-melanoma skin cancers” with a clinical focus on curative primary surgery. However, high risk SCC is now recognized as a significant cause of morbidity and mortality and due to the rate of increased incidence, more patients are now estimated to die annually from SCC in the United States (approximately 15,000 patients) than from cutaneous melanoma. Similar to melanoma, treatment plan decisions are based upon a patient’s estimated risk of recurrence or metastasis. However, unlike melanoma, the estimates are based upon small patient cohorts and our research shows that most clinicians rely upon individual clinical and pathologic features rather than a staging “group” for guiding treatment plan decisions. Our DecisionDx-SCC test, which we launched on August 31, 2020, is for use in the estimated 200,000 patients who present with one or more high risk features, representing an estimated U.S. TAM of $820 million.

Suspicious Pigmented Lesions

Suspicious pigmented lesions are unusual-looking lesions that may be melanoma. There are approximately two million skin biopsies performed specifically for the diagnosis of melanoma in the United States. Approximately 15% of these biopsies are classified as indeterminate, in which case a pathologist cannot make a definitive diagnosis as to whether the biopsy is benign or malignant. We estimate the U.S. TAM at $600 million for our DecisionDx DiffDx-Melanoma test, which we launched on November 2, 2020.

Uveal Melanoma Market Overview

The incidence of uveal melanoma has remained relatively constant over time with approximately 1,600 to 1,700 patients diagnosed per year in the United States, representing an estimated U.S. TAM of $7.0 million. Uveal melanomas arise from the three tissues comprising the uveal tract and vary by location with approximately 90% occurring in choroid, 5% in the ciliary body and 5% in the iris. Uveal melanoma may also be referred to as ocular melanoma.

Significant Limitations of Current Clinical and Pathology Staging Systems for Skin Cancer

The skin cancer disease market has significant unmet clinical needs, as clinical and pathology staging systems have traditionally applied a population-wide approach to estimate an individual patient’s risk of metastasis and have not incorporated the genomics of a patient’s tumor biology. This is unlike the diagnostic process applied to other solid tumors, such as breast and prostate cancer, where the broader use of genomics to understand tumor biology has led to individualized patient treatment

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plans. Not incorporating tumor biology leads to a discordance between the estimated and actual risk of metastasis, which results in over- and under-treatment as well as increased healthcare costs.

Cutaneous Melanoma

The clinical and pathology staging system for invasive cutaneous melanoma is based upon the anatomic findings of the melanoma; that is what the pathologist can see under the microscope from an initial tumor biopsy and what the physician can feel or see during a clinical exam or upon imaging. While this staging system provides population-based risk of metastasis estimates it does not evaluate nor incorporate the biology of the patient’s primary tumor.

Importantly, while it was formerly believed that the SLNB surgery improved melanoma specific survival, the landmark, prospective, randomized multi-center study conducted by the National Cancer Institute, the MSLT-I study, showed that death from melanoma was the same in patients who were randomized to the SLNB surgery or observation, indicating that the SLNB surgery is prognostic, and not therapeutic, as it relates to the risk of death from melanoma. On average, 12% of patients undergoing the SLNB surgery will have an SLN-positive biopsy result and 88% will not. The invasive SLNB surgery carries significant healthcare burden. For instance, the overall complication rate of SLNB was shown to be 11.3% in a systematic review of 21 articles representing 9,047 patients. A separate review reported that the regional false negative rate of the SLNB surgery ranged from 5% to 21%, with a median rate of 18%. Regional false negative rate is defined as the rate that metastasis to the regional lymph node in patients with a negative SLNB surgical result.

Both the complication and false negative rates are above the recommended 5% and 10% thresholds proposed by guideline committees. Further, the SLNB surgery requires the use of general anesthesia and nearly half of the surgeries are performed in an in-patient setting, leading to an average reimbursed cost of $20,000 to $24,000. Finally, the 88% SLN-negative rate carries significant patient and healthcare system implications. This means that 88% of the time, patients undergoing an SLNB will have no change in their treatment plan and no change in their staging but are still exposed to the complications from the surgery, including general anesthesia risks, cost and a median false negative rate of 18%. Thus, while it is true that patients who are SLN positive, or re-staged to Stage III, have a higher population-based rate of metastasis and death from melanoma, the SLNB surgery does not improve melanoma-specific survival, carries risk of complications, a high false negative rate and significant costs.

In addition to the significant clinical issues involved in only using the traditional clinical and pathology factors to determine SLNB eligibility, a discordance exists between an individual’s stage and their risk of metastasis or death from melanoma. Based on data from SEER and the American Joint Committee on Cancer, or AJCC, of the patients diagnosed with Stage I, II or III cutaneous melanoma, 80% of melanomas are classified as the lowest risk, Stage I, and 12% are classified as next lowest risk, Stage II. However, these data show that patients with melanomas that are initially diagnosed as Stage I or II represent 60% of all deaths in patients initially diagnosed as Stage I, II or III. Furthermore, while patients with Stage III melanoma are at a higher population risk of metastasis and death from melanoma, the five-year melanoma-specific survival rate for these patients is 77%. The limitations of the current staging system not only result in unnecessary SLNB surgeries for certain low-risk patients, but we believe also leads to overtreatment with adjuvant immune-oncology and targeted therapies for certain patients with Stage III melanoma.

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In summary, the risk of metastasis determines the treatment plans in newly diagnosed patients, including the recommendation for the SLNB surgery, decisions around the initiation of advanced imaging for active surveillance, frequency and specialty for clinical follow-up, initiation of adjuvant therapy and discussion of clinical trial enrollment opportunities. The top portion of the graphic below summarizes decision points that DecisionDx-Melanoma impact. The lower portion summarizes the limitations of solely relying upon risk of metastasis based upon clinical and pathology features alone as it relates to SLNB surgery and the subsequent treatment plan decisions.

Source: AJCC v7 J Clin Oncol 2009; SEER data release 2017; Morton et al. N Engl J Med 2014; Whiteman et al. J Invest Dermatol 2015; Shaikh et al. J Natl Cancer Inst 2016; Poklepovic and Carvajal. Oncology 2018; Sondak and Zager. Ann Surg Oncol 2010. Moody et al. Euro Jrnl Surg Onc 2017.

Cutaneous Squamous Cell Carcinoma

Identifying high risk SCC presents challenges for physicians. Unlike in cutaneous melanoma, where longitudinal databases were developed in an attempt to align population-based risk of metastasis with clinical and pathology factors, the same level of effort has not been given to SCC. There have been as many as three SCC staging systems in the United States, each with widely divergent classifications for high- and low-risk patients. For example, a 2014 study compared the AJCC version 7 and National Comprehensive Cancer Network, or NCCN, systems to assess concordance between the AJCC and NCCN systems. The AJCC system classified 82% as low risk while the NCCN system classified 13% as low risk. As such, this level of discordance results in the risk assessment staging systems minimally impacting treatment plans, with patients frequently being over- and under-treated.

Today, in addition to NCCN high-risk criteria, there are two principal staging systems for SCC: the AJCC version 8 (which is limited to head and neck SCC) and the Brigham Women’s Hospital, or BWH, version. All three systems rely upon a combination of clinical or pathology factors to stage or classify risk of metastasis. In general, NCCN identifies the majority of patients who do go on to metastasize, but it suffers from the lowest PPV of the three systems. Our initial clinical validation study of 321 patients was focused on patients with one or more high-risk features. Within this study, NCCN demonstrated a sensitivity of 96% while PPV was 7% and NPV was 90.5%. The low PPV means that 93 out of 100 NCCN high risk SCC’s did not actually metastasize. AJCC and BWH demonstrated a sensitivity of 38.5% and 25%, respectively, PPV of 33% and 35%,

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respectively and NPV of 88% and 86%, respectively. If one relies just upon NCCN, the low PPV means that developing an adjuvant treatment plan that includes radiation, or chemotherapy or complete lymph surgical dissection, or a combination of these, for a high-risk patient may be appropriate for the one out of fourteen high-risk patients who will metastasize but not for the remaining thirteen patients who would not have metastasized. For AJCC and BWH, the PPV does improve but it also means that two out of three patients would be recommended for an adjuvant treatment plan who will not benefit. These accuracy metrics have created significant discordance in the approach to managing patients with high-risk features, from one end of the spectrum being intervention for all high-risk patients to “watch and wait” for all high-risk patients. The end result is an unacceptable clinical discordance in the approach to treatment plans and significant over- and under-treatment for a diagnosis that leads to the most skin cancer deaths in the United States.

Suspicious Pigmented Lesions

A pigmented lesion biopsy that is difficult to diagnose may lead to an indeterminate diagnosis, in which case the treating physician generally leans towards making a conservative decision and assumes that the lesion is melanoma. A definitive diagnosis of invasive cutaneous melanoma results in a treatment plan that involves wider margins for the definitive wide local excision surgery, consideration of the SLNB surgery and post-diagnosis management plans, including frequent, high intensity surveillance using advanced imaging, frequent clinical visits and encouragement to enroll in clinical studies. If the indeterminate lesion was benign, then the recommendation in the majority of cases would be no additional intervention. Thus, the tendency of physicians to treat an indeterminate diagnosis as melanoma leads to significant over-treatment decisions, complications and increased healthcare costs.

Uveal Melanoma

Approximately 97% of patients with uveal melanoma have no evidence of metastatic disease at the time of diagnosis and the success rate for definitive treatment of the primary tumor surpasses 90%. However, within three years, approximately 30% of all patients will experience metastases. Prior to commercial availability of DecisionDx-UM, other clinical staging and molecular diagnostic tests existed for uveal melanoma, but the lack of prospective studies, coupled with low accuracy, resulted in these tests primarily being used for research purposes rather than for clinical management of patients in the United States. As a result, nearly all U.S. centers grouped patients into a single, high-risk treatment plan that included frequent, high intensity surveillance using advanced imaging, frequent clinical visits and encouragement to enroll in clinical studies.

Our Solution

We use the gene expression profile of an individual patient’s tumor biology to inform specific prognosis of metastasis or recurrence and aid the decision-making process of the treating physician and their patient to help optimize health outcomes and reduce healthcare costs. Due to the biological complexity of skin cancer, developing accurate products takes scientific diligence, stringent clinical protocols, machine learning expertise, proprietary algorithms and significant investments of time and capital. In addition, the underlying tissue samples and associated outcomes data required to develop and validate these products are difficult to obtain. Once successfully developed and validated, commercial success requires the generation of ongoing evidence such as clinical use documentation to support appropriate physician adoption, reimbursement success and guideline inclusion.

We currently market three proprietary dermatologic products: DecisionDx-Melanoma, DecisionDx-SCC and DecisionDx DiffDx-Melanoma. We also market DecisionDx-UM, a proprietary GEP test designed to identify the risk of metastasis in patients diagnosed with uveal melanoma. Multiple studies for our products have been published since completion of the initial clinical validation studies and have confirmed the accuracy of our products. Also, multiple clinical impact studies have demonstrated a significant impact on physician decisions to alter their treatment plan when the results of our test are considered in concert with the traditional clinical and pathology factors. DecisionDx-Melanoma and DecisionDx-UM are currently reimbursed by Medicare under positive coverage policies. In addition, we have received widespread positive private payor coverage and positive guideline inclusion for DecisionDx-UM, our first melanoma test. Since our inception, we have processed more than 70,000 clinical patient samples.

Our products are designed to provide the following benefits:

•Clinically Actionable Information for Physicians. We provide physicians and their patients with a report that contains clinically actionable information to inform the treatment plan for each individual patient. Our reports are updated as new clinical data is generated that may enable additional clinical decisions to be made. Based on four studies that we have conducted on clinical actionability of our DecisionDx-Melanoma test, utilizing the results of our test reports, physicians changed a patient’s treatment in approximately 50% of cases, indicating physician confidence in the evidence underlying our reports.

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•Informed Patient Care. The clinical evidence shows that our products are accurate predictors of a patient’s specific risk of metastasis or recurrence of their cancer based upon the gene expression profile of their tumor, independent of available clinical and pathology factors. Physicians use this information to identify patients who are likely to benefit from an escalation of care as well as those who may avoid unnecessary treatments, such as medical and surgical interventions.

•Reduced Healthcare Costs for Payors. We believe our products have the potential to reduce overall healthcare costs by enabling physicians and their patients to avoid unnecessary medical and surgical interventions, including the SLNB surgery. As an example, without DecisionDx-Melanoma, 88% of patients who receive the SLNB surgery, which has an average in-patient reimbursed cost of $20,000 to $24,000, are found to be SLN-negative and remain classified as low risk. If all patients eligible for the SLNB surgery were tested and their test results were acted upon, we estimate the potential savings to the U.S. healthcare system could be up to $250 million, after considering the cost of DecisionDx-Melanoma.

Our Products

We currently market three proprietary dermatologic products, DecisionDx-Melanoma, DecisionDx-SCC and DecisionDx DiffDx-Melanoma. We also market DecisionDx-UM, a proprietary GEP test designed to identify the risk of metastasis in patients diagnosed with uveal melanoma. Together, we believe these four commercial products support an estimated total addressable market of $2.0 billion in the United States. We have received positive local coverage determinations, or LCDs, providing Medicare coverage for DecisionDx-Melanoma and DecisionDx-UM. These LCDs facilitate reimbursement from Medicare, which represents approximately 50% of the addressable patient population. We also have third-party payor coverage for over 100 million lives for DecisionDx-UM and over 21 million lives for DecisionDx-Melanoma.

DecisionDx-Melanoma

Overview

We developed and market DecisionDx-Melanoma to healthcare providers for use with patients diagnosed with invasive cutaneous melanoma. Without the use of DecisionDx-Melanoma, these patients are classified in low- and high-risk categories based on population-wide clinical and pathology features, which impact a physician’s treatment plan recommendations, including whether or not to offer the invasive SLNB surgery, frequency and use of clinical imaging and follow-up frequency, adjuvant therapy and clinical trial enrollment. Unfortunately, these clinical and pathology features do not incorporate the genomics of an individual patient’s tumor biology, which often leads to a misclassification of a patient’s risk of metastasis or recurrence.

To address this need for a more accurate predictor of metastatic risk, we discovered, developed and completed validation for DecisionDx-Melanoma. This product is designed to help physicians identify high-risk patients with Stage I and II melanomas based on biological information, or expression, from 31 genes within their tumor tissue. DecisionDx-Melanoma does not change a physician’s standard diagnostic workflow for suspicious pigmented lesions, which includes performing the initial biopsy procedure and placing the biopsied tissue in formalin. The dermatopathologist then embeds the specimen in a paraffin block, cuts sections that are stained for viewing under a microscope and makes a diagnosis of invasive melanoma. We then extract and purify RNA from sections of the remaining specimen to run our test. We report test results in two classes and two subclasses. Class 1A represents the lowest risk group, Class 1B/2A represents an increased risk group and Class 2B represents the highest risk group.

In March 2021, we announced that DecisionDx-Melanoma now utilizes an Integrated Test Result, or ITR, designed to provide more precise risk prediction in patients with Stage I, II or III melanoma. The ITR is calculated by an independently validated algorithm (i31-GEP), designed to provide a more precise and personalized prediction of SLN positivity in order to guide discussions and recommendations, within current risk-based guidelines, for the SLNB surgical procedure. i31-GEP is an artificial intelligence-based neural network algorithm (independently validated in a cohort of 1,674 prospective, consecutively tested patients with T1-T4 cutaneous melanoma) that integrates the DecisionDx-Melanoma test result with the patient’s traditional clinicopathologic features. We expect to launch an app based on i31-GEP and the ITR later in 2021.

Clinical Validation

We have published 13 clinical validation studies of DecisionDx-Melanoma, which we believe is the largest clinical validation program of the metastatic risk of cutaneous melanoma ever conducted. Based on our published data, we have shown that

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DecisionDx-Melanoma is an accurate independent predictor of the risk of metastasis or recurrence, showing an aggregate melanoma-specific five-year survival rate of 99% for patients who receive the Class 1A test result.

Our first study, published in January 2015, analyzed 104 patients with Stage I, II and III melanoma from an independent cohort with long term outcomes data. This study reported a five-year disease-free survival rate of 98% for patients with Stage I and II melanoma who received a Class 1 test result. In addition, the study also reported that only 2% of patients with a Class 1 test result were SLN-positive.

Our January 2019 study published in the Journal of the American Academy of Dermatology reviewed data on 690 patients with Stage I, II and III melanoma from all three previously published long-term archival publications, and enabled analysis of clinically important subgroups. Overall, the study reported a five-year melanoma specific survival rate of 99% for patients with Stage I, II or III melanoma who received a Class 1A test result.

Our long-term outcomes study data shows that we can provide a more specific individual risk of metastasis and death from melanoma that is distinct from the AJCC stage approach that limits prediction to clinical and pathology factors. The only endpoint reported by the AJCC is death from melanoma. For patients diagnosed with Stage I melanoma, DecisionDx-Melanoma predominantly identifies patients with a risk of death from melanoma that is similar to a patient with Stage IIIA melanoma, with the remaining group having a 99.6% likelihood of being alive from melanoma at five years. For patients with an intermediate risk Stage II melanoma, DecisionDx-Melanoma can distinguish between patients who have a very low risk of death from melanoma (>99% likelihood of being alive at 5-years) from those who have a higher risk of death from melanoma that is similar to a patient with Stage IIIA/IIIB melanoma. For patients with a Stage III melanoma, DecisionDx-Melanoma can identify patients who have a likelihood of death from melanoma similar to a patient with Stage IIA melanoma, with the remainder having a risk similar to a patient with Stage IIIC melanoma.

The ability of DecisionDx-Melanoma to improve the risk of recurrence or risk of death from melanoma accuracy of these patient populations is clinically significant as NCCN guidelines recommend that the duration and frequency of follow-up and intensity of cross-sectional imaging be based on a patient’s individual conditional probability of recurrence. The NCCN guideline cut-point for these decisions is between Stage I-IIA versus Stage IIB-III. For example, the chart below demonstrates that a patient with a Stage I melanoma but a DecisionDx-Melanoma Class 2B test result has a melanoma specific survival rate of 89.5%, which is a higher risk than if the patient had a Stage IIIA melanoma. Today, patients with a Stage III melanoma are recommended to have an increased follow-up schedule, undergo routine cross-sectional imaging, consider initiation of adjuvant therapy, such as an anti-PD1 inhibitor, and consider enrollment in a clinical trial. None of these options would be considered in a patient with a Stage I melanoma in the absence of a DecisionDx-Melanoma test result.

The first prospective, multi-center study of 322 patients with Stage I, II and III melanoma was published in August 2017. This interim analysis reported a recurrence free survival rate of 97% and overall survival rate of 99% for patients with Stage I, II and III melanoma who received a Class 1 test result.

The most recent, independent, prospective, multi-center study of 86 patients with Stage IB and II melanoma was published in February 2019 in the Journal of The European Academy of Dermatology and Venereology. This study reported a recurrence

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free survival rate of 100% for patients with Stage IB and II melanoma who received a DecisionDx-Melanoma Class 1 test result.

An independent, prospective, single-center study of 159 patients with Stage I, II and III melanoma was published in March 2019 in Cancer Medicine. Of patients who recurred, the median time to recurrence was 13 months. Of patients who did not recur, the median follow-up time was 45 months. This study reported that the DecisionDx-Melanoma test was an independent predictor of recurrence (p=0.0001) and the most significant predictor of recurrence with a hazard ratio of 9.2 compared to hazard ratio of 3.5 for SLNB status and 1.2 for Breslow thickness. The DecisionDx-Melanoma test was also an independent predictor for distant metastasis and the most significant with a hazard ratio of 19.0 compared to 3.75 for SLNB status (Breslow thickness was not statistically independent). NPV for Class 1 for distant metastasis-free survival was 99%.

When evaluating DecisionDx-Melanoma, one of the most important criteria is whether the test adds new information that is independent of the traditional clinical and pathology factors. The formal statistical method used to evaluate independence is the Cox multivariate analysis. Outputs of the Cox multivariate analysis include statistical significance, measured by p-value, as well as the power of the result, measured by Hazard Ratio, or HR. A p-value of less than 0.05 indicates statistical significance and thus independence. If statistical significance is reached, then the HR indicates the power of the result, with a higher HR indicating greater outcome prediction. For example, an HR of nine means that patients with a high-risk test result are nine times more likely to experience metastasis or death than a low-risk test result. The table below shows the Cox multivariate analysis of the disease-free survival, melanoma-specific survival and recurrence free survival from the four performance studies noted above.

The American Academy of Dermatology and other organizations use the Strength of Recommendation Taxonomy, or SORT, system to evaluate prognostic tests such as DecisionDx-Melanoma. The SORT system ranks evidence of clinical validity as levels 1, 2 or 3, and assigns a strength of recommendation as levels A, B or C. A SORT level 1A is the highest level and 3C is the lowest. For SORT ranking, “a systematic review or meta-analysis of good quality studies” or “a prospective study with good follow-up” represents a level 1 for good quality evidence of clinical validity. For SORT strength of recommendation, “consistent, good quality evidence” represents a level A recommendation. A systematic review and meta-analysis was published in the Journal of the American Academy of Dermatologyin 2020 in an article titled “Molecular risk prediction in cutaneous melanoma: a meta-analysis of the 31-gene expression profile prognostic test in 1,479 patients.” This meta-analysis reviewed multiple peer-reviewed published clinical validation studies of DecisionDx-Melanoma, including prospective studies. The meta-analysis and the prospective studies satisfied the level 1 ranking of good quality studies and the consistency of DecisionDx-Melanoma data across these studies satisfied the level A strength of recommendation. Thus, the authors concluded that DecisionDx-Melanoma achieved a 1A level of evidence of clinical validity and strength of recommendation under the

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SORT system. Furthermore, as shown below, the multi-variate analysis for recurrence-free survival found DecisionDx-Melanoma to be the strongest predictor of risk of recurrence compared to the evaluable clinical and pathology factors.

In addition, we conducted a prospective, multi-center study of 1,421 patients, which was published in Future Oncology in January 2019 which focused on the performance of DecisionDx-Melanoma to predict metastasis to the SLN. This study found that patients with a Class 1A test result with melanomas less than or equal to 2.0 mm thick, which represents 86% of all melanomas, have a 95% probability for an SLN-negative biopsy result. Analyzing this data by age shows that patients 65 years of age or older have a 98% NPV, those between 64 and 55 years of age have a 95% NPV and patients under 55 years of age have a 92% NPV. For physicians and patients evaluating whether to use DecisionDx-Melanoma to guide decision-making on the SLNB surgery, the impact on melanoma specific survival is an important consideration if the SLN status is not known. To address this, we analyzed the long-term outcome data from our Gastman 2019 publication and showed that patients of all ages with a melanoma less than or equal to 2.0 mm thick and a Class 1A test result have a five-year melanoma specific survival rate of 99.6%, while similar patients 55 years or older had a melanoma specific survival rate of 99.3%. This study showed that use of DecisionDx-Melanoma for patients with melanomas of less than or equal to 2.0 mm thick could potentially result in 74% fewer SLNB surgeries.

Clinical Utility

We completed and published four consecutive studies between September 2016 and March 2018 documenting how DecisionDx-Melanoma impacts treatment plan decisions. Based on the results of our DecisionDx-Melanoma test reports, physicians changed their treatment plan recommendations approximately 50% of the time. This change in the management of patient treatment plan recommendations compares favorably to leading molecular diagnostic tests as well as to the SLNB surgery, which only changes clinical decision-making approximately 12% of the time.

Study Design # of Patients % Change in Management

Building on our clinical utility evidence, in October 2020, the publication in Future Oncology of a retrospective study, titled “Integrating the melanoma 31-gene expression profile test to surgical oncology practice within national guideline and staging recommendations,” shows that DecisionDx-Melanoma impacted management decisions for patients diagnosed with AJCC 7th edition stage I – III melanoma. Study authors developed a recommended melanoma patient care algorithm that incorporates DecisionDx-Melanoma to help inform frequency and duration of follow-up visits, blood work and surveillance imaging in line with predicted metastatic risk. Patients’ DecisionDx-Melanoma test result was found to have an impact on the number and duration of follow-up and surveillance visits, and patients assessed as having a high risk of metastasis (designated by a DecisionDx-Melanoma Class 2 test result) received more intensive management than patients assessed as having a low risk

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(designated by a DecisionDx-Melanoma Class 1 test result). Clinicians using the test were shown to adjust patient management in a risk-appropriate direction, within recommendations of national guidelines.

These studies illustrate how physicians use DecisionDx-Melanoma to inform the treatment pathway for patients who have been diagnosed with invasive cutaneous melanoma. Our DecisionDx-Melanoma test informs two initial treatment decisions: (1) to determine whether to offer and recommend the SLNB surgery to patients with melanomas less than or equal to 2.0 mm thick, and (2) following this decision, to guide the appropriate post-SLNB surgery treatment plan for their patients, including decision-making regarding advanced imaging, frequency of clinical visits, referral to medical oncology, adjuvant therapy, clinical trial enrollment, and watchful waiting.

Health Economics

We believe that the use of DecisionDx-Melanoma can reduce the number of SLNB surgeries, which has an average in-person reimbursed cost of between $20,000 and $24,000, thereby reducing overall cost of patient treatment for invasive cutaneous melanoma. If all patients eligible for the SLNB surgery were tested and their test results were acted upon, we estimate the potential savings to the U.S. healthcare system could be up to $250 million, after considering the cost of DecisionDx-Melanoma.

In addition, DecisionDx-Melanoma can be used to make more informed decisions on advanced imaging, frequency of clinical visits, referral to medical oncology, adjuvant therapy initiation and clinical trial enrollment. In some cases, the DecisionDx-Melanoma test result may guide an appropriate reduction in these decisions based upon a low risk of metastasis and in others it will guide an appropriate increase with the end result being improved use of healthcare resources.

The American Medical Association’s, or the AMA’s, Current Procedural Terminology Editorial Panel accepted Castle’s application for a Category I Multianalyte Assays with Algorithmic Analyses, or MAAA, Current Procedural Terminology, or CPT, code for its DecisionDx-Melanoma test. The CPT Editorial Panel is an independent group of expert volunteers representing various sectors of the health care industry. Its role is to ensure that code changes undergo evidence-based review and meet specific criteria. The code became effective on January 1, 2021. With this acceptance, two of our proprietary MAAA tests, DecisionDx-Melanoma and DecisionDx-UM, have met the criteria required for a Category I MAAA CPT code.

DecisionDx-SCC

The current treatment pathway for patients identified as having high-risk SCC suffers from a low PPV for risk of metastasis or recurrence. As a result, many patients categorized as high risk received adjuvant therapy and other unnecessary medical and surgical interventions even though they would not have gone on to metastasize. Conversely, there are also many patients categorized as high risk who are placed in “watchful waiting” who could benefit from adjuvant therapy.

To address this clinical need in SCC, we developed DecisionDx-SCC, a proprietary 40-gene expression profile test that uses an individual patient’s tumor biology to predict individual risk of squamous cell carcinoma metastasis for patients with one or more risk factors. The test result, in which patients are stratified into a Class 1, 2A or 2B risk category, predicts individual metastatic risk to inform risk-appropriate management. The test is designed to provide a better PPV while maintaining similar NPV. We commercially launched DecisionDx-SCC on August 31, 2020. Four peer-reviewed publications have demonstrated that DecisionDx-SCC is an independent predictor of metastatic risk and that integrating DecisionDx-SCC with current prognostic methods can add positive predictive value to clinician decisions regarding staging and management.

In 2020, development and validation data was published in the Journal of the American Academy of Dermatology in an article titled “Validation of a 40-Gene Expression Profile Test to Predict Metastatic Risk in Localized High-Risk Cutaneous Squamous Cell Carcinoma.” The study findings indicate that DecisionDx-SCC demonstrated strong independent prognostic value in multivariate analysis compared to the BWH and AJCC v8 staging systems. We have ongoing multi-center studies involving more than 75 U.S. centers.

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DecisionDx DiffDx-Melanoma

Of the two million suspicious pigmented lesions biopsied annually in the U.S., we estimate that approximately 300,000 of those cannot confidently be classified as either benign or malignant through traditional histopathology methods. A biopsy of a pigmented lesion may lead to an indeterminate diagnosis, in which case the treating physician generally leans towards making a conservative decision and assumes that the lesion is melanoma.

To address this clinical need, we developed DecisionDx DiffDx-Melanoma, a proprietary GEP test designed to be used as an adjunct to histopathology when the distinction between a benign lesion and melanoma is uncertain. We commercially launched this product on November 2, 2020. DiffDx-Melanoma classifies these lesions as benign (gene expression profile suggestive of benign neoplasm); intermediate-risk (gene express profile cannot exclude malignancy); or malignant (gene expression profile suggestive of melanoma). Interpreted in the context of other clinical, laboratory and histopathologic information, DiffDx-Melanoma is designed to add diagnostic clarity and confidence for dermatopathologists while helping dermatologists deliver more informed patient management plans. Validation of this test included a variety of benign and malignant lesions.

In 2020, two studies were published in SKIN: The Journal of Cutaneous Medicine. The development and validation study, “Development and Validation of a Diagnostic 35-Gene Expression Profile Test for Ambiguous or Difficult-To-Diagnose Suspicious Pigmented Skin Lesions,” showed that the DiffDx-Melanoma test had a technical success rate of 97%, meaning that a test result was successfully generated, and achieved accuracy metrics that could alleviate uncertainty in difficult-to-diagnose lesions leading to decreased unnecessary procedures while appropriately identifying at-risk patients. The clinical utility study, “A 35-Gene Expression Profile Test for Use in Suspicious Pigmented Lesions Impacts Clinical Management Decisions of Dermatopathologists and Dermatologists,” concluded that the diagnosis of challenging melanocytic neoplasms and subsequent clinical management decisions were influenced by DiffDx-Melanoma results in alignment with the test result. The utility of the test may provide the opportunity for clinicians to deliver more informed patient management plans.

DecisionDx-UM

Overview

At the time of diagnosis nearly all patients with uveal melanoma have no evidence of metastasis yet approximately 30% of uveal melanoma goes on to metastasize within three years and nearly 50% of uveal melanoma goes on to metastasize, overall. Traditional clinical staging and molecular diagnostic tests exist for uveal melanoma, but the lack of prospective studies of these tests, coupled with low accuracy, has resulted in these tests primarily being used for research purposes rather than for clinical management of patients in the United States. As a result, nearly all U.S. centers group patients into a single, high-risk treatment plan that included frequent, high intensity surveillance using advanced imaging, frequent clinical visits and encouragement to enroll in clinical studies.

DecisionDx-UM is a proprietary GEP test that helps healthcare providers predict the risk of metastasis in patients with uveal melanoma. We licensed the intellectual property for DecisionDx-UM from The Washington University in St. Louis, Missouri, or WUSTL, completed analytical validation and began marketing DecisionDx-UM in late 2009 for use in patients diagnosed with uveal melanoma without evidence of metastatic disease. DecisionDx-UM identifies which patients are at low risk for progression of their disease so that their physicians can appropriately de-escalate the level of care provided. DecisionDx-UM is delivered to approximately 1,500 patients annually, representing approximately 92% of the patients diagnosed in the United States.

Sixteen peer-reviewed publications supporting the clinical validity and utility of DecisionDx-UM have been conducted.

The Kaplan-Meier plot from the initial prospective, multi-center Collaborative Ocular Oncology Group, or COOG, study found a 97% NPV for risk of metastasis. This study also compared DecisionDx-UM to the traditional clinical and pathology factors as well as chromosome 3 status, which is an alternative molecular test to predict the risk of metastasis in uveal melanoma. As is shown in the Cox multivariate analysis, the only statistically significant factor in predicting a likelihood of metastasis was DecisionDx-UM.

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The data from the COOG study, as well as the consistency shown from the additional clinical validity studies, has supported wide-spread adoption of DecisionDx-UM with more than 90% of the ocular oncology institutions in the United States ordering this test.

DecisionDx-UM has been used to guide treatment plan decisions regarding the intensity of a patient’s surveillance and management plan as well as clinical trial enrollment.

The current NCCN Guidelines for Uveal Melanoma (last updated January 2021) incorporate DecisionDx-UM as the first risk of distant metastasis predictor to guide systemic imaging.

Development Engine and Pipeline

We identify areas of significant unmet medical needs in the treatment of dermatologic diseases and leverage our expertise in genomics, data analytics and artificial intelligence to develop clinically actionable products. We focus first on previously unanswered medical questions, which we often identify as the result of the in-depth conversations our sales and medical affairs representatives have with physicians. We leverage our deep understanding of dermatologic diseases and clinical treatment pathways to identify areas of unmet medical need where better information can improve, and potentially transform, patient outcomes. Next, our team of scientists and laboratory technologists use the latest genomic methods to discover RNA-based gene expression profiles that are likely to impact treatment pathway decisions. Our bioinformatics team works collaboratively with our scientists to build proprietary algorithms based on machine-learning techniques to predict the risk of metastasis or recurrence based on the genomics of each individual patient’s tumor biology.

Once we have generated a product candidate that we believe will address an unmet medical need, we work to validate the product candidate through extensive testing of patient tissue samples combined with clinical outcomes data. We use both our extensive data bank of patient tumor samples and clinical outcomes data to run development and validation studies and conduct clinical studies to collect new samples in additional diseases. We publish our data regularly to drive adoption, reimbursement and guideline inclusion.

We have significant expertise in developing proprietary algorithms, conducting clinical studies and using the necessary instrumentation required for efficiently developing our pipeline products. We have initiated work on a number of pipeline tests which branch out upstream, downstream and parallel to our currently marketed tests. Although we are still in the early stages of development, we believe we could launch three to five new tests by the end of 2025, utilizing our existing sales channels,

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potentially adding approximately $3.6 billion to our current U.S. TAM. We expect to provide additional details on these pipeline products before the end of 2021.

Our Commercial Channel

Sales and Marketing

Our sales and marketing efforts are currently focused on the United States skin cancer market. We employ a direct sales and marketing strategy to educate dermatologists, surgeons and other physicians on the clinical and economic benefits of our products. Our sales approach is highly technical, and our team is trained to articulate the scientific and clinical evidence behind our products and how they influence the clinical care pathway and ultimately improve patient outcomes. Our sales force is focused on educating and informing the entire patient care team, which consists of treating clinicians, nurses, laboratory and pathology personnel, and finance administrators, on the appropriate use and value of our tests.

In December 2018, our customer-facing commercial and medical affairs group was staffed in the low 20s. We successfully executed two expansions (in the first quarter of 2019 and in December 2019) bringing the total to the low 50s. Our customer-facing team is focused on leading high clinical impact discussions with the treating clinician’s areas of interest, including clinical utility, patient outcomes, and supporting evidence. We saw significant promotion responsiveness in 2019.

We increased our outside sales territories from 14 to 23 in the first quarter of 2019 and also added supporting inside sales associates, medical affairs and marketing staff. We believed that this increase in customer-facing personnel would increase the adoption of our products as we would be able to educate more physicians on the clinical benefits of our products. We did see the promotion responsiveness that we anticipated and conducted a second expansion in December 2019 that brought our outside sales territories to 32. In the third quarter of 2020, we expanded our commercial team to create a dedicated sales force of ten territories to support the launch of our DecisionDx DiffDx-Melanoma test to dermatopathologists, while our existing sales team remains focused on DecisionDx-Melanoma and DecisionDx-SCC. We ultimately believe that our DecisionDx DiffDx-Melanoma test will be ordered by both dermatopathologists and dermatologists. Thus, it is our intention, to fold this new dedicated team into the existing sales team as well as further expand in the first half of 2021 bringing us to approximately 60 outside sales territories. However, we will also continue to evaluate our mix of outside sales territories, inside sales support, marketing and medical affairs in the context of our dermatologic tests and adjust our investments based upon these evaluations.

DecisionDx-UM addresses a small cancer market, and patients are managed by a small group of ocular oncology surgeons, generally ophthalmology or retina trained specialists. We serve these patients and their physicians by providing highly technical interactions that focus on optimizing the appropriate use of our proprietary and ancillary products.

Medical Affairs

We also deploy an experienced medical affairs group to assist education of treating physicians and key opinion leaders, to identify and engage sites for our sponsored clinical studies and to evaluate collaborative study opportunities. Our medical affairs strategy complements our sales and marketing and clinical research operations efforts.

Reimbursement

The primary source of revenue for our products is reimbursement from third-party payors, which includes government payors, such as Medicare, and commercial payors, such as insurance companies. Achieving broad coverage and reimbursement of our current products by third-party payors and continued Medicare coverage are key components of our financial success. De novo coverage by government and third-party payors for our pipeline tests will be important over time.

Government Payors

Medicare coverage is limited to items and services that are within the scope of a Medicare benefit category and that are reasonable and necessary for the diagnosis or treatment of an illness or injury. LCDs are made through an evidence-based process by Medicare Administrative Contractors, or MACs, with opportunities for public participation.

Palmetto GBA MolDX, or Palmetto, the MAC responsible for administering MolDX, the program that assesses molecular diagnostic technologies, issued a final LCD for DecisionDx-Melanoma, which became effective on December 3, 2018. Noridian Healthcare Solutions, LLC, or Noridian, the MAC responsible for administering claims for laboratory services performed in Arizona, adopted the same coverage policy as Palmetto on that date, and subsequently issued a final LCD on February 10, 2019. This LCD provided for coverage for patients who are eligible for the SLNB surgery with cutaneous melanoma tumors of 2.0 mm in thickness or less, and patients with clinically negative SLN basins who are being considered for the SLNB surgery to determine eligibility for adjuvant therapy. Melanomas less than or equal to 2.0 mm thick represent 86% of all melanomas. The median age at diagnosis is 63 years old, therefore the Medicare eligible population represents close to 50% of the addressable market.

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Palmetto issued a final expanded LCD for DecisionDx-Melanoma, effective November 22, 2020. With this expanded LCD and the accompanying billing and coding articles, we estimate that a significant majority of the DecisionDx-Melanoma tests performed for Medicare patients will meet the coverage criteria. Noridian has adopted the same coverage policy as Palmetto and also issued an expanded final LCD for DecisionDx-Melanoma effective December 6, 2020.

Separately, Palmetto issued a final LCD for DecisionDx-UM, which became effective in July 2017, and Noridian issued a similar LCD that became effective in September 2017. The Noridian LCD provides for coverage to determine metastatic risk in connection with the management of a patient’s newly diagnosed uveal melanoma and to guide surveillance and referral to medical oncology for those patients. Similar to cutaneous melanoma the median age at diagnosis for uveal melanoma is estimated at 58-62 years old, therefore the Medicare eligible population represents close to 45% of the addressable market.

On May 17, 2019, CMS determined that DecisionDx-UM meets the criteria for “existing advanced diagnostic laboratory test” status, also referred to as “existing ADLT” status. Accordingly, in 2021 the DecisionDx-UM Medicare rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year. Note that our rate for 2020 was set by Noridian, our local MAC, but our rate for 2021 for DecisionDx-UM will be $7,776 based on the median private payor rate. Also, on May 17, 2019, CMS determined that DecisionDx-Melanoma meets the criteria for “new ADLT” status. Accordingly, from July 1, 2019 through March 31, 2020, the Medicare reimbursement rate was equal to the initial list price of $7,193. From April 1, 2020 through December 31, 2021, CMS notified us that the rate will also be $7,193, which was calculated based upon the median private payor rate for DecisionDx-Melanoma from July 1, 2019 to November 30, 2019. Beginning in 2022, the rate for both DecisionDx-Melanoma and DecisionDx-UM will be set annually based upon the median private payor rate for the first half of the second preceding calendar year. For example, the rate for 2022 will be set using median private payor rate data from January 1, 2020 to June 30, 2020.

In the second quarter of 2020, we submitted our technical assessment dossier for DecisionDx-SCC to Palmetto and Noridian. In early 2021, we submitted our technical assessment dossier for DecisionDx DiffDx-Melanoma. We expect that draft LCDs for each of these tests will be posted in 2021. However, there is no assurance that the timing of any draft LCD or final LCD will match our expectations or our historical experience with LCDs for our other tests.

Commercial Third-Party Payors

We are actively engaged in efforts to achieve broad coverage and reimbursement for our products, followed by contracting with commercial payors. Achieving positive coverage reduces the need for appeals and reduces failures to collect from the patient’s commercial payor. Even with positive coverage decisions, we still experience delays in time to payment. Achieving in-network contracts with third-party payors can shorten the time required to receive payments. Implementing our strategy includes our managed care and medical affairs teams educating third-party payors regarding our strong clinical utility and outcomes data, which we believe validates the value of our products and will persuade more third-party payors to provide value-based reimbursement.

We have broad positive policy coverage for our DecisionDx-UM test, we have executed contracts with certain commercial payors and anticipate further increases in contracting. We also have positive policy recommendations from many third-party technical assessment review groups.

We began, following the Medicare LCD, engaging commercial third-party payors for positive coverage for DecisionDx-Melanoma and have seen some positive coverage policies. With the continued evidence development, we anticipate additional positive coverage policies occurring.

Dependence on Third-Party Payors

We receive a substantial portion of our revenue from a small number of third-party payors, primarily Medicare, BlueCross BlueShield affiliates and Medicare Advantage plans. Our revenue from patients covered by Medicare, Medicare Advantage plans, and BlueCross BlueShield plans, as a percentage of total revenue, was 58%, 29% and 6%, respectively, for the year ended December 31, 2020. BlueCross BlueShield plans and Medicare Advantage plans represent an aggregation of multiple payors making independent reimbursement decisions; however, these plans often base reimbursement decisions on common guidelines which can influence multiple plans simultaneously.

Competition

We are focused on providing high value diagnostic and prognostic solutions for dermatological cancers. We believe, today, that there is limited existing competition for our products that provide evidence-based genomic solutions to physicians and their patients.

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We believe the principal competitive factors in our target markets include:

•Proprietary, disciplined approach to genomic analysis including the use of proprietary deep learning, machine learning, artificial intelligence and other techniques to identify and optimize gene selection and algorithmic approaches to answer the clinically important questions with accurate tests. This involves the ability to design and efficiently conduct the right clinical studies at the right time;

•Research and development investments to document the quality, quantity, consistency and strength of the clinical validity data, the impact our products have on clinical use, and demonstration of net health outcome improvement that reduce health system costs;

•Maintaining a strong reputation with the treating physician by providing consistent, transparent, clinically relevant information that will improve the appropriate management of their patients;

•Ease of use in accessing our products, reimbursement support for the physician and their patient and laboratory reports that clearly communicate the clinically relevant data points;

•Demonstrated ability to work with, and secure coverage and reimbursement from, governmental and commercial payors;

•Ability to efficiently commercialize pipeline products to the same customer base as our current products.

We believe we compete favorably on the factors described above.

Today, our principal competition for DecisionDx-Melanoma is existing traditional clinical and pathology staging criteria. While some clinical and pathology criteria have changed over time, this approach has been the standard of care in the United States for many years, and physicians may be unwilling to accept the validity of the published data and adopt our test until it has become incorporated into national guidelines. In addition, we may, in the near future, face competition from a limited number of companies who are working in this disease space, such as Neracare and SkylineDx.

We are unaware of late-stage work being performed to develop and validate a product that would compete with DecisionDx-SCC. We believe that the current primary competitor for DecisionDx-SCC is existing traditional clinical and pathology staging criteria.

We are aware of competitors that likely compete with our DecisionDx DiffDx-Melanoma, such as Myriad Genetics. We expect our product to compete favorably with these competitors.

DecisionDx-UM competes with a subsidiary of LabCorp and several academic laboratories all of which have had tests available for several years. To date, our data has demonstrated that DecisionDx-UM is clinically and statistically superior to these products.

Laboratory Operations

The Laboratory Developed Tests, or LDTs, that we commercialize are conducted in our CAP accredited, CLIA-certified primary facility in Phoenix, Arizona, which we moved into in April 2016. In 2020, we doubled our footprint to approximately 23,500 square feet by adding a new laboratory facility in close proximity to our primary facility to support our growth and provide certain operational redundancy. In 2021, we further expanded this facility to include approximately 3,600 additional square feet. We perform all laboratory procedures involved in our tests from receiving a requisition form to issuance of the final test result in these facilities. Our prior capacity plan analysis indicated that we could process up to 60,000 proprietary GEP test orders annually, with a single shift. We performed more than 18,000 proprietary GEP tests in 2020. We are able to provide our proprietary DecisionDx-Melanoma, DecisionDx-SCC, DecisionDx DiffDx-Melanoma and DecisionDx-UM products for patients in all fifty states including those that require specific, additional, out-of-state lab licenses or qualifications such as New York, California, Pennsylvania, Maryland, and Rhode Island. Upon receipt, orders and samples are processed through an automated laboratory information management system which, in addition to tracking sample chain of custody, initiates and tracks accessioning, sample eligibility, technical data generation, algorithmic analysis and results reporting. The majority of samples are received as paraffin embedded sections from a formalin fixed tissue specimen.

Our laboratory facilities house all functions related to quality control and assurance, licensing, accreditation and regulatory compliance. Our quality management program ensures the quality of our laboratory services and products through continuous monitoring of a broad range of key performance indicators including technical, customer service and cybersecurity metrics. Through this program, we promote a philosophy of continuous improvement based upon adherence to validated standards. Our Phoenix facilities also house our clinical research operations and local information technology support.

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Raw Materials and Suppliers

We procure reagents, equipment, chips/cards and other materials used to perform our tests from sole suppliers such as ThermoFisher Scientific, Inc., and Qiagen, Inc. Some of these items are unique to these suppliers and vendors. While we have developed alternate sourcing strategies for these materials and vendors and while we have experienced no business interruption due to an inability to source these materials, we cannot be certain whether these strategies will be effective or whether alternative sources will be available when we need them. If these suppliers can no longer provide us with the materials we need to perform our test services, they do not meet our quality specifications, or we cannot obtain acceptable substitute materials, our business would be negatively affected.

License Agreement with The Washington University

In November 2009, we entered into a license agreement, or the License Agreement, with WUSTL to license certain patent rights and technical information from WUSTL for the development of melanoma products, or the Products, and services, or the Services. The rights licensed under this agreement are used in DecisionDx-UM only.

Under the License Agreement, we obtain an exclusive, worldwide, royalty-bearing license to certain patent rights owned by WUSTL, or the Patent Rights, and a non-exclusive, worldwide license to certain technical information and research property owned by WUSTL, with the right to grant sublicenses under certain conditions, to develop the Products and Services. WUSTL retains the right to use the Patent Rights for research purposes.

The Patent Rights that we license pursuant to the License Agreement have been generated through the use of U.S. government funding and are therefore subject to certain federal regulations. See “Risk Factors—Risks Related to Intellectual Property—Our in-licensed intellectual property has been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements and a preference for U.S.-based companies, and compliance with such regulations may limit our exclusive rights, and limit our ability to contract with non-U.S. manufacturers.”

Under the License Agreement, we are required to use best efforts to carry out the activities under an agreed-upon development plan, or the Development Plan, and meet any and all milestones set forth in the Development Plan. We are required to make milestone payments to WUSTL upon successful completion of development and commercialization milestones as set forth in the Development Plan. For each Product or Service that receives FDA approval, premarket approval or premarket notification, we are obligated to make a milestone payment to WUSTL in the mid-four digits. For the issuance of the first U.S. patent and the first foreign patent, we are obligated to make aggregate milestone payments to WUSTL in the low-five digits.

Under the License Agreement, we were obligated to pay WUSTL an initial license issue fee in the low-five digits. We are also obligated to make royalty payments to WUSTL equal to (i) a percentage in the mid-single digits of our and any of our affiliates’ or sub-licensees’ net sales of Products and (ii) a percentage in the low-single digits of our and any of our affiliates’ or sub-licensees’ revenue from Services. We are also obligated to make royalty payments to WUSTL in the low-to-mid single digit percentage of net sales, with minimum royalty payments to WUSTL every six-month period following the first commercial sale.

The term of the License Agreement will continue for ten years following the last-to-expire valid claim relating to the Patent Rights, unless terminated earlier. WUSTL may terminate the License Agreement upon written notice in the event of (i) our material breach if such breach remains uncured for 90 days, (ii) the exercise of certain rights by us with respect to the Patent Rights and/or the licensed technical information outside the scope of the License Agreement, or (iii) for certain insolvency-related events. We may terminate the License Agreement without cause upon written notice to WUSTL and payment of any amount due to WUSTL under the License Agreement.

Intellectual Property

Our core technology for our products is related to methods and devices for analysis of genetic expression. Using this technology, we are able to provide a more accurate prediction of a patient’s metastatic risk as compared to other methods. We have secured and continue to pursue intellectual property rights globally, including through patent protection covering analysis of metastasis in cutaneous melanoma, as well as treatment of cutaneous squamous cell carcinoma. We also rely on trademarks, trade secrets, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintain our proprietary position. For more information, please see “Risk Factors—Risks Related to Intellectual Property.”

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Patents and Patent Applications

We have developed a global patent portfolio that as of December 31, 2020, is comprised as follows:

Number of Applications and Patents

Commercial Focus United States International Total

Owned Patent Families

Methods for predicting risk of metastasis in cutaneous melanoma 2 16 18

Methods of diagnosing and treating patients with pigmented skin lesions 2 — 2

Method of predicting risk for recurrence for soft tissue sarcoma 1 — 1

Licensed Portfolio from WUSTL

Method for predicting risk of metastasis 2 — 2

Compositions and methods for detecting cancer metastasis 2 2 4

Included in the table above are five issued U.S. patents and 13 issued international patents. This global patent portfolio has filing dates ranging from 2009 to 2020, and therefore are projected to expire between 2029 and 2040, subject to any patent term extension or patent term adjustment that might be available in a particular jurisdiction. The owned and licensed families contain issued patents and pending applications that relate to devices, systems, and methods for macromolecular analysis, and reflect our active and ongoing research programs.

Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued for regularly filed applications in the United States are granted a term of 20 years from the earliest effective non-provisional filing date. In addition, in certain instances, a patent term can be extended to recapture a period due to delay by the United States Patent and Trademark Office, or USPTO, in issuing the patent as well as a portion of the term effectively lost as a result of the FDA regulatory review period. However, as to the FDA component, the restoration period cannot be longer than five years and the total patent term including the restoration period must not exceed 14 years following FDA approval. The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective non-provisional filing date. However, the actual protection afforded by a patent varies on a product-by-product basis, from country to country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patent.

Trademarks and Trade Secrets

As of the date of this Annual Report on Form 10-K, our U.S. trademark portfolio contained eight trademark registrations.

We rely upon trade secrets, know-how, continuing technological innovation and potential in-licensing opportunities to develop and maintain our competitive position. We seek to protect our intellectual property and proprietary technology, in part, by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, as applicable, our advisors. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with an employee or a third party. These agreements may be breached, and we may not have adequate remedies for any breach. We additionally seek to preserve the integrity and confidentiality of our data and trade secrets, such as our proprietary algorithms, by maintaining the physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

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Government Regulation and Product Approval

Regulations

Clinical Laboratory Improvement Amendments of 1988 (CLIA)

As a clinical reference laboratory, we are required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Under CLIA, we are required to hold a certificate applicable to the type of laboratory tests we perform and to comply with standards applicable to our operations, including test processes, personnel, facilities administration, equipment maintenance, recordkeeping, quality systems and proficiency testing. We must maintain CLIA compliance and certification to be eligible to bill for diagnostic services provided to Medicare beneficiaries.

To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Because we are a College of American Pathologists, or CAP, accredited laboratory, CMS does not perform this survey and inspection and relies on our CAP survey and inspection. We may also be subject to additional unannounced inspections. The regulatory and compliance standards applicable to the testing we perform may change over time, and any such changes could have a material effect on our business.

Penalties for non-compliance with CLIA requirements include suspension, limitation or revocation of the laboratory’s CLIA certificate, as well as directed plan of correction, state on-site monitoring, civil money penalties, civil injunctive suit or criminal penalties.

State Laboratory Licensing

In addition to federal certification requirements of laboratories under CLIA, CLIA provides that states may adopt laboratory regulations and licensure requirements that are more stringent than those under federal law. Such laws, among other things, establish standards for the day-to-day operation of a clinical reference laboratory, including the training and skills required of personnel and quality control. We currently provide laboratory services in all 50 states and maintain out-of-state laboratory licenses in New York, California, Maryland, Pennsylvania and Rhode Island.

Multiple states require the licensure of out-of-state laboratories that accept specimens from those states. Because we receive specimens from New York, our clinical reference laboratory is required to be licensed by New York, under New York laws and regulations. New York law also mandates proficiency testing for laboratories licensed under New York state law, regardless of whether such laboratories are located in New York. If a laboratory is out of compliance with New York statutory or regulatory standards, the New York State Department of Health, or NYSDOH, may suspend, limit, revoke or annul the laboratory’s New York license, censure the holder of the license, or assess civil money penalties. We have received formal approval from NYSDOH to offer our proprietary DecisionDx-Melanoma, DecisionDx-UM and DecisionDx-PRAME products in New York. Additionally, we have been granted conditional permission by NYSDOH to offer our DecisionDx-SCC and DecisionDx DiffDx-Melanoma tests in New York while our applications are under review. If we were to be found out of compliance with New York laboratory requirements, we could be subject to such sanctions, which could harm our business.

Federal Oversight of Laboratory Developed Tests

The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex, and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. Clinical laboratory tests are regulated under CLIA, as administered by CMS, as well as by applicable state laws. In addition, 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. Among other things, pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, pre-market clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. 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 LDTs. As a result, we believe our diagnostic services are currently subject to the FDA’s enforcement discretion and are not subject to the FDA’s oversight. However, reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to regulation.

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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 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.

Although the FDA halted finalization of the guidance in November 2016 to allow for further public discussion on an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution, 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.

Medical Device Regulatory Framework

Although we currently market our proprietary testing products as LDTs, which are currently subject to enforcement discretion, we could be subject to more onerous FDA compliance obligations in the future. Specifically, if the FDA begins to actively regulate LDTs, then, unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDCA, also referred to as a 510(k) clearance, or approval from the FDA of a premarket approval, or PMA, application. Both the 510(k) clearance and PMA processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees.

Device Classification

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

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

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

Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining devices, or implantable devices, in addition to those deemed novel and not substantially equivalent following the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the General Controls and Special Controls described above. Therefore, these devices are subject to the PMA application process, which is generally more costly and time-consuming than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies. 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 United States, absent certain limited exceptions, human clinical trials intended to support medical device clearance or approval require an investigational device exemption, or 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 Institutional Review Board, or 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

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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.

The 510(k) Clearance Process

Under the 510(k) clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence.

After a 510(k) premarket notification is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review, the FDA will refuse to accept the 510(k) notification. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device.

If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. 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. De novo classification may also be available after receipt of a “not substantially equivalent” letter following submission of a 510(k) to FDA.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, could require a PMA application. The FDA requires each manufacturer to determine whether the proposed change requires a new submission in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications are accomplished by a letter-to-file in which the manufacture documents the change in an internal letter-to-file. The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for such change. 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. In addition, in these circumstances, the FDA can impose significant regulatory fines or penalties for failure to submit the requisite application(s).

The PMA Approval Process

Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin the review. The FDA has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may

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request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA.

Before approving or denying a PMA, an FDA advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. The FDA is not bound by the recommendations of an advisory 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; and

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

If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain and lengthy and a number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing.

New PMA applications or PMA supplements 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.

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. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. 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.

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 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.

Sanctions for a Stark Law violation include the following:

•denial of payment for the services provided in violation of the prohibition;

•refunds of amounts collected by an entity in violation of the Stark Law;

•a civil penalty for each bill or claim for a service arising out of the prohibited referral;

•the imposition of up to three times the amounts for each item or service wrongfully claimed;

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•possible exclusion from federal healthcare programs, including Medicare and Medicaid; and

•a civil penalty for each arrangement or scheme that the parties know (or should know) has the principal purpose of circumventing the Stark Law’s prohibition.

These prohibitions apply regardless of any intent by the parties to induce or reward referrals or the reasons for the financial relationship and the referral. In addition, knowing violations of the Stark Law may also serve as the basis for liability under the federal False Claims Act, or the FCA, which can result in additional civil and criminal penalties.

Federal and State Anti-Kickback Laws

The federal Anti-Kickback Statute, or the AKS, makes it a felony for a person or entity, including a clinical laboratory, to knowingly and willfully offer, pay, solicit or receive any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in order to induce business that is reimbursable under any federal health care program. A violation of the AKS may result in imprisonment for up to ten years and fines for each violation and administrative civil money penalties, including an additional amount of up to three times the amount of the remuneration paid. Convictions under the AKS result in mandatory exclusion from federal health care programs for a minimum of five years. In addition, The U.S. Department of Health and Human Services, or HHS, has the authority to impose civil assessments and fines and to exclude health care providers and others engaged in prohibited activities from Medicare, Medicaid and other federal health care programs. In addition, the government may assert that a claim that includes items or services resulting from a violation of the AKS constitutes a false or fraudulent claim under the FCA, which is discussed in greater detail below. 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 AKS applies only to items and services reimbursable under any federal health care program, a number of states have passed statutes substantially similar to the AKS that apply to all payors. Penalties of such state laws include imprisonment and significant monetary fines.

Federal and state law enforcement authorities scrutinize arrangements between health care providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to induce patient care referrals or induce the purchase or prescribing of particular products or services. Generally, courts have taken a broad interpretation of the scope of the AKS, holding that the statute may be violated if merely one purpose of a payment arrangement is to induce referrals or purchases.

In addition to statutory exceptions to the AKS, regulations provide for a number of safe harbors. If an arrangement meets the provisions of a safe harbor, it is deemed not to violate the AKS. An arrangement must fully comply with each element of an applicable safe harbor in order to qualify for protection.

Failure to meet the requirements of the safe harbor, however, does not render an arrangement illegal. Rather, the government may evaluate such arrangements on a case-by-case basis, taking into account all facts and circumstances.

Other Federal and State Health Care Laws

In addition to the requirements discussed above, several other health care fraud and abuse laws could have an effect on our business. For example, provisions of the Social Security Act permit Medicare and Medicaid to exclude an entity that charges the federal health care programs substantially in excess of its usual charges for its services. The terms “usual charge” and “substantially in excess” are subject to varying interpretations.

The FCA prohibits, among other things, a person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval and from, making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim in order to secure payment or retaining an overpayment by the federal government. In addition to actions initiated by the government itself, the statute authorizes actions to be brought on behalf of the federal government by a private party having knowledge of the alleged fraud. 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. 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. Several states have enacted comparable false claims laws which may be broader in scope and 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 under the civil monetary penalties statute. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries, for

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example, in connection with patient assistance programs, can also be held liable under the AKS and FCA. One of the statutory exceptions to the prohibition is non-routine, unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable collection efforts. The Office of Inspector General of HHS, or the OIG, emphasizes, however, that this exception should only be used occasionally to address special financial needs of a particular patient. Although this prohibition applies only to federal healthcare program beneficiaries, 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 payor.

The federal Health Insurance Portability and Accountability Act of 1996, or 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 AKS, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

The Physician Payments Sunshine Act, enacted as part of the ACA, as amended among other things, also imposed annual reporting requirements on manufacturers of certain devices, drugs and biologics for certain payments and transfers of value by them and in some cases their distributors to physicians and teaching hospitals, and certain other healthcare professionals beginning January 1, 2022 for payments and transfers of value provided during the previous year; as well as ownership and investment interests held by physicians and their immediate family members. Any failure to comply with these reporting requirements could result in significant fines and penalties. Because we manufacture our own LDTs solely for use by or within our own laboratory, we believe that we are exempt from these reporting requirements. We cannot assure you, however, that the government will agree with our determination, and a determination that we have violated these laws and regulations, or a public announcement that we are being investigated for possible violations, could adversely affect our business, prospects, results of operations or financial condition.

State equivalents of each of the above federal laws, such as anti-kickback and false claims laws, that may impose similar or more prohibitive restrictions, and may apply to items or services reimbursed by non-governmental third-party payors, including private insurers.

If our operations are found to be in violation of any of the fraud and abuse laws described above or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal, civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual damages, reputational harm, integrity oversight and reporting obligations, diminished profits and future earnings, and the curtailment or restructuring of our operations.

International Regulations

Many countries in which we may offer any of our testing products in the future have anti-kickback regulations prohibiting providers from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable under any national health care program. In situations involving physicians employed by state-funded institutions or national health care agencies, violation of the local anti-kickback law may also constitute a violation of the U.S. Foreign Corrupt Practices Act, or FCPA.

The FCPA prohibits any U.S. individual, business entity or employee of a U.S. business entity to offer or provide, directly or through a third party, including any potential distributors we may rely on in certain markets, anything of value to a foreign government 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. 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, its books and records provisions and its anti-bribery provisions.

The standard of intent and knowledge in the Anti-Bribery cases is minimal-intent and knowledge are usually inferred from that fact that bribery took place. The accounting provisions do not require intent. Violations of the FCPA’s anti-bribery provisions for corporations and other business entities are subject to a fine of up to $2 million and officers, directors, stockholders, employees, and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. Other countries, including the United Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United Kingdom Anti-Bribery Act.

When marketing our testing products outside of the United States, we may be subject to foreign regulatory requirements governing human clinical testing, prohibitions on the import of tissue necessary for us to perform our testing products or restrictions on the export of tissue imposed by countries outside of the United States or the import of tissue into the United

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States, and marketing approval. These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement approvals are also required.

Privacy and Security Laws

Health Insurance Portability and Accountability Act

Under HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, HHS has issued regulations to protect the privacy and provide for the 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. Penalties for violations of HIPAA and HITECH laws and regulations include significant civil and criminal penalties.

Three standards have been promulgated under HIPAA’s and HITECH’s regulations: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information, the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures, and the Security Standards for the Protection of Electronic Protected Health Information, which require covered entities and business associates to implement and maintain certain security measures to safeguard certain electronic health information, including the adoption of administrative, physical and technical safeguards to protect such information.

The HIPAA privacy regulations cover the use and disclosure of PHI by covered entities and business associates, which are defined to include subcontractors that create, receive, maintain, or transmit PHI on behalf of a covered entity, as well as their covered subcontractors. They also set forth certain rights that an individual has with respect to his or her PHI maintained by a covered entity, including the right to access or amend certain records containing PHI, or to request restrictions on the use or disclosure of PHI. The HIPAA security regulations establish requirements for safeguarding the confidentiality, integrity, and availability of PHI that is electronically transmitted or electronically stored. HITECH, among other things, established certain health information security breach notification requirements. A covered entity must notify any individual whose PHI is breached according to the specifications set forth in the breach notification rule. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not preempt state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI or insofar as such state laws apply to personal information that is broader in scope than PHI.

Individuals (or their personal representatives, as applicable) have the right to access test reports directly from laboratories and to direct that copies of those reports be transmitted to persons or entities designated by the individual.

HIPAA authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit against us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities, such as us, and their business associates for compliance with the HIPAA privacy and security standards. 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.

As a covered entity with downstream vendors and subcontractors and, in certain instances, as a business associate of other covered entities with whom we have entered into a business associate agreement, we have certain obligations under HIPAA regarding the use and disclosure of any PHI that may be provided to us. HIPAA and HITECH impose civil and criminal penalties against covered entities and business associates for noncompliance with privacy and security requirements. Further, various states, such as California and Massachusetts, have implemented similar privacy laws and regulations that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information, or PII.

Numerous other federal, state and foreign laws, including consumer protection laws and regulations, govern the collection, dissemination, use, access to, confidentiality and security of patient health information. We intend to continue to comprehensively protect all personal information and to comply with all applicable laws regarding the protection of such information.

Reimbursement for Clinical Laboratory Services

We generate revenue on our products from several sources, including third-party payors, laboratory services intermediaries, and self-paying individuals. Depending on the billing arrangement and applicable law, we must bill various third-party payors, such as insurance companies, Medicare, Medicaid, and patients, all of which have different billing requirements. Compliance with

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applicable laws and regulations as well as internal compliance policies and procedures adds further complexity to the billing process. CMS establishes new procedures and continuously evaluates and implements changes to the reimbursement process for billing the Medicare program.

To receive reimbursement from third-party payors, we bill our tests using a variety of CPT codes, as defined by the AMA. For those genetic tests we conduct that do not have a dedicated CPT code, test may be billed under a miscellaneous code for an unlisted molecular pathology procedure. Because these miscellaneous codes do not describe a specific service, the third-party payor claim may need to be examined to determine the service that was provided, whether the service was appropriate and medically necessary and whether payment should be rendered. This process can require a letter of medical necessity from the ordering physician and it can result in a delay in processing the claim, a lower reimbursement amount, or denial of the claim.

With the evolution of genetic testing, we have seen individual third-party payors’ medical coverage policies around the CPT codes we bill and their associated payment rates change over time, resulting in changes to our reimbursement revenues. We believe all of our products provide significant clinical value and reduction in downstream healthcare spend, as evidenced in research studies and clinical publications, which we believe will continue to support and drive third-party payor reimbursement.

Under Medicare, payment for products like ours is generally made under the Clinical Laboratory Fee Schedule, or CLFS, with payment amounts assigned to specific procedure billing codes. 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, certain laboratories were required to report to CMS private payor payment rates and volumes for their tests. CMS uses this data to calculate a weighted median payment rate for each test, which will be used to establish revised Medicare CLFS reimbursement rates for the test. Laboratories that fail to report the required payment information may be subject to substantial civil penalties. We bill Medicare for our products, and therefore we are subject to reporting requirements under PAMA.

On May 17, 2019, CMS determined that DecisionDx-UM meets the criteria for “existing ADLT” status. Accordingly, in 2021 the DecisionDx-UM Medicare rate will be set annually based upon the median private payor rate for the first half of the second preceding calendar year. Note that our rate for 2020 was set by Noridian, our local MAC, but our rate for 2021 for DecisionDx-UM will be $7,776 based on the median private payor rate. Also, on May 17, 2019, CMS determined that DecisionDx-Melanoma meets the criteria for “new ADLT” status. Accordingly, from July 1, 2019 through March 31, 2020, the Medicare reimbursement rate was equal to the initial list price of $7,193. From April 1, 2020 through December 31, 2021, CMS notified us that the rate will also be $7,193, which was calculated based upon the median private payor rate for DecisionDx-Melanoma from July 1, 2019 to November 30, 2019. Beginning in 2022, the rate for both DecisionDx-Melanoma and DecisionDx-UM will be set annually based upon the median private payor rate for the first half of the second preceding calendar year. For example, the rate for 2022 will be set using median private payor rate data from January 1, 2020 to June 30, 2020.

PAMA also authorizes the adoption of new, temporary billing codes and/or unique test identifiers for FDA-cleared or approved tests as well as ADLTs. The AMA’s CPT Editorial Panel has approved a proposal to create a new section of billing codes to facilitate implementation of this section of PAMA. These proprietary laboratory analyses codes may be requested by a clinical laboratory or manufacturer to specifically identify their test. If approved, the codes are issued by the AMA on a quarterly basis. Our DecisionDx-UM test was granted a Category I MAAA CPT code and was effective January 1, 2020. Our DecisionDx-Melanoma test was granted a Category I MAAA CPT code and was effective January 1, 2021.

Healthcare Reform

In March 2010, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the ACA, became law. The ACA contains a number of provisions that are expected to impact our business and operations, some of which in ways we cannot currently predict, including those governing enrollment in state and federal healthcare programs, reimbursement changes and fraud and abuse, which impact existing state and federal health care programs and will result in the development of new programs Among other things, the ACA required each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, and began to apply to sales of taxable medical devices after December 31, 2012, but was suspended in 2016. Further, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the medical device tax and “Cadillac” tax on high-cost employer-sponsored health coverage and, effective January 1, 2021, also eliminates the health insurer tax. 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.

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Since 2016, there have been efforts to repeal all or part of the ACA, and the previous administration and the U.S. Congress have taken action to roll back certain provisions of the ACA. It is unknown what actions, if any, the current administration and the U.S. Congress may take regarding the ACA.

Additionally, on December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the tax penalty on certain individuals who fail to maintain qualifying health coverage for all or part of a year, commonly referred to as the “individual mandate.” Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit ruled that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. The United States Supreme Court is currently reviewing this case, but it is unclearwhen a decision will be made. It is also unclear how the Supreme Court ruling, other such litigation and the healthcare reform measures of the Biden administration will impact the ACA.

Human Capital Resources

Overview

As of December 31, 2020, we had 201 employees, of whom 199 were full-time employees. During the year ended December 31, 2020, our employee count grew by 66 persons, or 48.9%. We face competition for experienced, qualified personnel in our industry, particularly for highly skilled scientists, laboratory technicians and salespeople.

The tables below provide information on the distribution of our employees by functional area and by location as of December 31, 2020:

Number of Employees

Laboratory Testing Operations 37

Research & Development 40

Sales & Marketing 74

Administrative & General 50

Number of Employees

Friendswood, Texas 52

Phoenix, Arizona 61

Home-based throughout the U.S. 88

Our employees are not represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.

Diversity and Inclusion

We recognize the importance of diversity and inclusion in recruiting, developing and retaining the best available talent. We are committed to further understanding and building upon our existing diversity and inclusion strengths and are in the process of identifying opportunities and developing related initiatives.

As of December 31, 2020, our employees were 62.7% female and 37.3% male. Our overall employee population as of December 31, 2020 was 79.1% White, 9.5% Hispanic or Latino, 5.0% Asian, 1.5% Black or African-American and 4.9% two or more races (not Hispanic or Latino) and other. In executive positions, which we define as Executive Director or Regional Business Director level and above, our employee population as of December 31, 2020 was 86.4% White, 4.6% American Indian or Alaska Native, 4.6% Hispanic or Latino and 4.4% two or more races (not Hispanic or Latino). Females represented 31.8% of employees in executive positions. We are continuing to further assess and understand additional measures of diversity.

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Compensation, Benefits and Professional Development

We are committed to offering competitive benefits and compensation packages to our employees. In addition to competitive base pay, we offer the following benefits, among others, to our full-time employees:

•a defined contribution 401(k) plan with employer matching contributions;

•an annual bonus opportunity;

•equity compensation, including stock options, restricted stock units and an employee stock purchase plan;

•medical, dental and vision plans;

•paid maternity, paternity and adoption leave policies;

•paid holidays and paid time off; and

•an employee assistance program.

We survey all new hires 90 days after the start of their employment to solicit feedback on employee engagement. We provide performance reviews at least once per year, with pay raises commensurate with market and performance indicators.

We prioritize and encourage internal growth and professional development of our employees. To encourage employee development, we offer a professional development reimbursement program to eligible employees who attend job-related professional development activities.

Corporate and Other Information

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CSTL · 10-K · period ended 2020-12-31

Item 1. Business.

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CSTL · 10-K · period ended 2020-12-31

Item 1. Business.

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