SecProbe.io

CORRESP
1
filename1.htm

corresp

PILLSBURY WINTHROP SHAW PITTMAN LLP

P.O. BOX 7880

SAN FRANCISCO, CA 94120

Tel: (415) 983-1000

Fax: (415) 983-1200

August 22, 2005

VIA ELECTRONIC TRANSMISSION

Securities and Exchange Commission

Division of Corporate Finance

100 F Street, N.E.

Washington, D.C. 20549

Mail Stop 6010

Attn: Mr. Albert C. Lee, Staff Attorney

     Re:

    Genomic Health, Inc.

    Registration Statement on Form S-1 (File No. 333-126626)

Dear Mr. Lee:

     On behalf of Genomic Health, Inc. (the “Registrant”), attached hereto as Exhibit A please find
a copy of the supplemental information dated August 3, 2005 (the “Supplemental Information”) that
the Registrant previously provided to the staff (the “Staff”) of the Securities and Exchange
Commission. The attached Supplemental Information is being filed on EDGAR pursuant to Comment No.
47 of the Staff’s comment letter dated August 11, 2005.

Very truly yours,

/s/ Justin D. Hovey

Justin D. Hovey

Enc.

Exhibit A

Supplemental Information dated August 3, 2005

[GENOMIC HEALTH, INC. LETTERHEAD]

August 3, 2005

VIA FACSIMILE AND FEDERAL EXPRESS

Albert Lee

Staff Attorney

Securities and Exchange Commission

Division of Corporation Finance, Mail Stop 6010

100 F Street N.E.

Washington, DC 20549

Facsimile: (202) 772-9217

    Re:

    Genomic Health, Inc. (the “Company”) Registration Statement on Form S-1 Registration No.
333-126626 (the “Registration Statement”)

Dear Mr. Lee:

We are writing to provide you with information to assist the staff of the Securities and Exchange
Commission (the “Staff”) in its review of the above-referenced Registration Statement. While not
reflected in the Registration Statement, as filed, the Company currently anticipates a public
offering price range of $3.25 to $4.25 per share (on a pre-reverse split basis) for the Company’s
common stock (the “Common Stock”). A future amendment to the Registration Statement will give
effect to an anticipated reverse stock split, which will depend on market conditions and both our
and the underwriters’ estimate of an appropriate valuation.

We are providing the following information for the Staff’s consideration in connection with the
Company’s pricing of stock options granted during the period from January 2004 through March 2005.
Included in this letter are tables summarizing all stock option grants during this period to
employees, directors and nonemployees. Table A lists the grant date, number of shares, exercise
price, reassessed fair value as set forth in this letter and related deferred stock-based
compensation for stock options granted to employees and directors. Table B lists the grant date,
number of shares and exercise price of stock options granted to nonemployees.

All of the options listed in Tables A and B were granted at the then-current fair value of the
Common Stock, as determined by the Company’s Board of Directors at the time of each grant. The
Company believes that its 2001 Stock Incentive Plan (the “Option Plan”) meets all of the required
criteria set forth in APB Opinion No. 25 and in the Internal Revenue Code of 1986, as amended (the
“Code”), that are essential to classify option grants as non-compensatory. The terms of the Option
Plan require that incentive stock options granted by the Company have exercise prices equal to at
least 100% of the fair market value of the Common Stock at the time of grant. All options granted
since 2001 were intended to be incentive stock options or were otherwise granted at 100% of the
then-current fair market value. The Company believes that the actions of its Board to establish
the fair market value of the Common Stock at such dates were prudent and done with due care so as
to comply with the requirements of APB Opinion No. 25 as
to non-

Albert Lee

August 3, 2005

Page 2

compensatory
options and to preserve the status of such options as incentive stock options
under the Option Plan and the Code.

A substantial majority of the Company’s Board of Directors is comprised of non-officer directors,
including several venture capitalists. These individuals have considerable experience in operating
or financing life science companies and, as a group, are familiar with the issues surrounding the
valuation of options and other securities of life science companies. In addition, many of the
directors represent, or is himself, a significant stockholder of the Company and therefore would
experience significant dilution in the event of an issuance of Common Stock at less than fair
market value. The Company believes that the composition of the Board of Directors resulted in an
unbiased view of the value of the Common Stock, and, together with the Board’s cumulative knowledge
of, and experience with, other similar companies, produced a reasonable estimate of the
then-current fair value of the Common Stock. In the absence of a public trading market, the Board
of Directors considered numerous objective and subjective factors to determine the fair value at
each option grant date, including the factors described below:

    (a)

    the option grants involved illiquid securities in a private company;

    (b)

    the shares of Common Stock acquired upon exercise are subject to vesting
(generally 25% after the first year and the ratably per month over the remaining three
years or 1/48th per month over the four years);

    (c)

    the price of the Series E preferred stock issued by the Company in 2004, and
the rights, preferences and privileges of the Company’s Series A, B, C, D and E
Preferred Stock (the “Preferred Stock”) over the Common Stock;

    (d)

    the Company’s performance, operating results and status of clinical trials and
preclinical activities at the time of grant;

    (e)

    important developments relating to advancement of the Company’s current
product;

    (f)

    the Company’s stage of development and progress in implementing business
strategy;

    (g)

    equity market conditions and trading ranges of comparable public companies; and

    (h)

    the likelihood of achieving a liquidity event for the shares of Common Stock
underlying these options, such as an initial public offering or sale of the Company,
given prevailing market conditions.

The Board of Directors specifically took into account the following provisions of the Preferred
Stock in determining the fair value of the Common Stock at the time of the option grants:

    (a)

    the participation rights of the holders of Preferred Stock that provide for pro
rata sharing of liquidation proceeds with the holders of Common Stock (up to a

Albert Lee

August 3, 2005

Page 3

    specified cap for each series of Preferred Stock) after the payment of the aggregate
liquidation preference to the holders of Preferred Stock;

    (b)

    the conversion and anti-dilution provisions of the Preferred Stock and the fact
that the Preferred Stock will not automatically convert into Common Stock unless the
price per share in an initial public offering is at least $3.80 (on a pre-reverse split
basis) with aggregate offering proceeds of at least $20.0 million;

    (c)

    the non-cumulative nature of the Series A, B, C, D and E Preferred Stock
dividends, with annual dividends of $0.08, $0.148, $0.177, $0.184 and $0.226, when and
if declared, per share prior to the payment of any other dividends;

    (d)

    the voting power of holders of Preferred Stock relative to holders of Common
Stock.

Nevertheless, in connection with the preparation for filing the Registration Statement, the Company
reconsidered whether the stock options granted since January 2004 contained a compensatory element
which should be recorded on the Company’s books. The Company believes January 2004 is the
appropriate starting date to perform an analysis of the reassessed fair value of its stock because
the Company launched its first commercial product, Oncotype DX, in that month. As a result of its
review, the Company has concluded that compensation expense should be recorded for stock options
granted between January 2004 and March 2005 and in any future months where the exercise price is
below the reassessed fair value.

To that end, the Company has recorded an aggregate of approximately $3.6 million in deferred
stock-based compensation for options granted in the period from January 2004 through December 31,
2004. Approximately $191,000 of this amount was expensed during the year ended December 31, 2004
and $232,000 was expensed in the quarter ended March 31, 2005. The remaining approximately $3.3
million will be expensed in future periods. As a result of stock options granted in February and
March 2005, the Company recorded additional deferred stock-based compensation expense totaling
approximately $174,000 in the quarter ending March 31, 2005. The Company will continue to record
additional deferred stock-based compensation expense in future periods based on the difference
between the reassessed fair value of the Common Stock and the exercise price underlying subsequent
option grants. The Company amortizes deferred stock-based compensation expense over the applicable
vesting period on a straight-line basis.

Albert Lee

August 3, 2005

Page 4

Early Business Operations

The Company was incorporated in August 2000 to develop genomic-based clinical diagnostic tests for
patients with cancer, which tests provide information about a specific tumor at the molecular
level. The Company’s goal was to develop tests which would allow doctors and patients to make more
informed personalized decisions regarding patient treatment options. Accordingly, the Company’s
primary activities from inception through December 2003 included establishing its research
facility, hiring employees, building its laboratory and conducting research regarding the genes and
gene pathways which may play a role in cancer. The Company funded these efforts through the
issuance and sale of preferred stock, raising $7,935,000 in November 2000, approximately
$29,000,000 in January 2001, $5,000,000 in March 2001, and an aggregate of $9,370,000 at various
times in 2002. During this time, the Company’s efforts were focused on reviewing and analyzing
genes to comprise possible test candidates and developing and refining the process whereby the
Company is able to extract RNA from small samples of tumor specimens. After narrowing the field to
250 cancer-related genes out of the approximately 25,000 genes in the human genome, in 2002 and
early 2003, the Company undertook three independent clinical studies designed to correlate the
expression of these genes to known patient outcomes. From these studies, the Company narrowed the
gene candidates to the 21 genes which comprise its current test for breast cancer, Oncotype DX, and
set about clinically validating the ability of what it calls the “Recurrence Score” to
differentiate between patients with high and low risk of recurrence of their cancer in 10 years.

In order to validate their test results, the Company performed a study with the National Surgical
Adjuvant Breast and Bowel Project (“NSABP”) which commenced in June 2003. The results of this
validation study were presented at the 26th Annual San Antonio Breast Cancer Symposium
in December 2003. Following on these successes, the Company launched its first product, Oncotype
DX, in January 2004.

Albert Lee

August 3, 2005

Page 5

Stock Options Granted

At the time of the grant of the stock options below, the Company believed that the then-current
estimated fair value set by its Board of Directors was appropriate. However, with the benefit of
hindsight and the knowledge of how numerous uncertainties existing at the time of option grants
were resolved, the Company has carefully considered the issues relevant to estimating the
compensatory element of stock options granted since January 2004. Based on this review, the
Company believes that it has recorded appropriate amounts for deferred stock-based compensation and
related amortization expense related to the option grants.

Table A — Options Granted to Employees and Board Members

    Reassessed Fair

    Deferred

    Value as a

    Stock

    Number of

    Exercise

    Reassessed

    Percentage of

    Compensation

    Grant Date

    Shares

    Price

    Fair Value

    $3.75

    Expense

    February 2004

    224,800

    $
    0.46

    $
    0.65

    17
    %

    $
    43,000

    April 2004

    104,000

    $
    0.46

    $
    1.04

    28
    %

    $
    60,000

    June 2004

    20,000

    $
    0.46

    $
    1.43

    38
    %

    $
    19,000

    July 2004

    450,000

    $
    0.46

    $
    1.62

    43
    %

    $
    522,000

    September 2004

    301,000

    $
    0.46

    $
    2.01

    54
    %

    $
    467,000

    October 2004

    130,000

    $
    0.46

    $
    2.20

    59
    %

    $
    226,000

    December 2004

    1,253,000

    $
    1.00

    $
    2.59

    69
    %

    $
    1,992,000

    December 2004

    200,000

    $
    1.10

    $
    2.59

    69
    %

    $
    298,000

    February 2005

    16,500

    $
    1.00

    $
    2.98

    79
    %

    $
    33,000

    March 2005

    65,000

    $
    1.00

    $
    3.17

    85
    %

    $
    141,000

    $
    3,801,000

Albert Lee

August 3, 2005

Page 6

The stock options in Table B below have been accounted for in accordance with SFAS No. 123
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, and Emerging Issues Task Force
Consensus (“EITF”) No. 96-18, Accounting for Equity Instruments that are Issued to other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services, with the fair value of
such options being periodically remeasured as such options vest using the reassessed fair value as
determined by the Company.

Table B — Options Granted to Nonemployees

    Grant Date

    Number of Shares

    Exercise Price

    February 2004

    3,000

    $
    0.46

    September 2004

    20,000

    $
    0.46

    December 2004

    2,000

    $
    1.00

Business Operations — January 2004 through June 2005

The Company believes that the reassessed fair value of the Common Stock, as set forth in Table A
and described above, is fair and reasonable in view of Company-specific business and general market
conditions at the time of each option grant. In reaching its conclusions, a number of internal and
external factors affected the Company’s determinations, including:

In January 2004, the Company commercially launched Oncotype DX. In February, March and April,
2004, the Company sold an aggregate of 10,638,298 shares of its Series E Preferred Stock at $2.82
per share for gross proceeds of approximately $30 million. These funds were used to finance the
Company’s ongoing research efforts, to expand its clinical laboratory and to finance its clinical
development efforts. During the spring and summer of 2004, the Company conducted additional
studies with the NSABP to test additional attributes of Oncotype DX. In the summer, the results
from one of these clinical studies demonstrated that Oncotype DX predicts the likelihood of disease
recurrence in tamoxifen-treated patients with lymph node negative (N-), estrogen receptor positive
(ER+) breast cancer because it captures both prognosis and response to the drug tamoxifen. It also
predicted the magnitude of response to tamoxifen based upon a patient’s Recurrence Score. In
September 2004, results of another clinical study with the NSABP demonstrated that Oncotype DX also
correlates with the likelihood of chemotherapy benefit in early stage N-, ER+ breast cancer
patients. In October 2004, the results of a study conducted with Northern California Kaiser
Permanente demonstrated that the Recurrence Score is independently associated with risk of breast
cancer death and is able to identify subgroups of patients according to low, intermediate and high
risk of death at