What Early State Companies Need to Know About Medicare Reimbursement

1. What Early State Companies Need to Know About Medicare Reimbursement BioUtah E & I SummitSalt Lake City Utah Brian P. Carey Foley Hoag LLP

2. Early Focus on Reimbursement • Payers and FDA have different evidentiary requirements • Proactively engage with Medicare and private payers during clinical development • Don’t wait until FDA approval or commercial launch • Evolving standards for reimbursement

3. U. S. Food and Drug Administration (FDA) “Safe and Effective” Mission to promote and protect the public health by helping safe and effective products reach the market in a timely way To monitor products for continued safety after they are approved for marketing To provide the public with accurate, science-based information needed to improve health The Centers for Medicare & Medicaid Services (CMS) “Reasonable and Necessary” Mission to ensure healthcare security for beneficiaries Administers the Medicare program Develops Medicare coverage and reimbursement policies for the Medicare program Works in partnership with States to administer the Medicaid program and the State Children’s Health Insurance Program (SCHIP) FDA and CMS: Two Agencies, Two Distinct Missions

4. CMS is Not the FDA

5. Medicare Reimbursement Basics Is the new technology medically necessary for the patient? Will the technology be reimbursed? How will providers bill for the technology? Coverage Payment Coding * You need all three to be successful

6. Medicare Coverage Process National Coverage Decision (NCD) • Very detailed review • Lengthy process (9-12 months) • 5-10 annually Local Coverage Decision (LCD) • Level of “review” and analysis highly variable • “We don’t cover X because it is not reasonable and necessary.”

7. Statutory Basis “. . . no payment may be made. . .for expenses incurred for items or services. . . [which], except for items and services described in a succeeding subparagraph, are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.” Sec. 1862(a)(1), Title 18, SSA • Not defined in regulation • More than safe and effective • Improves health outcomes • Generalizable to the Medicare population • Case studies provides greater detail

8. FDA/CMS Parallel Review Opportunity for Innovative new technologies to meet with CMS while undergoing FDA review Facilitates pre-market data sharing among agencies FDA recently proposed option to involve Commercial Payers

9. Post-Market Data Collection Coverage with Evidence Development (CED) links coverage to requirement for prospective data collection Goal to allow beneficiary access while address research gaps in evidence Intent is to guide clinical research to address questions of interest to Medicare Currently limited to National level so has been of limited application

10. Medicare Payment • Reimbursement policy varies by setting

11. Medicare Programs

12. Medicare Programs

13. Medicare Programs

14. Medicare Programs

15. Long Term Reimbursement Trends • Downward price pressure • Higher utilization but greater demand for value from payers • Evolving definition of “value” • comparative effectiveness research • Incentives for greater integration of care delivery • Large-scale pilot programs seeking to coordinate care

16. Medicare is undergoing transformation • Medicare covers over 55 million lives and spends roughly $600B • Emerging transformation from paying based on quantity of services and costs to value • Greater emphasis on evidence based medicine and improvement of health outcomes • Increasing transparency on costs and comparative effectiveness of treatments • Payment and coverage policy influences most commercial payers

17. Delivery System and Payment Transformation Current SystemFuture System Provider-CenteredPatient-Centered Volume DrivenOutcomes Driven Fragmented Care Coordinated Care FFS Payment Systems Alternate Payment Models • Value-based purchasing • ACOs, Shared Savings • Episode-based payments • Data Transparency

18. CMMI Alternate Payment Models

19. Proprietary Clinical Genetic TestingAutism Spectrum Disorder, Developmental Delay, and other complex disorders

20. “Lineage” of Lineagen 2007/2010 2002/2006 2014/2016 • FOUNDING • $3.7MM Non-Equity Capital • “Lineagen Research Corporation” was founded as a not-for-profit to commercialize Utah’s unique genetic assets (UPDB) • SERIES A ROUND • $10.8M Equity • Spun out “Lineagen, Inc.” as a for-profit from LRC in 2006 • SERIES B/C ROUND • $27.1M Equity • 90 employees • Sold and billed over 5,000 genetic tests • Billed over 200 unique payers • 85% CAGR in revenue since launch in 2012

21. Provide two clinical genetic testing technologies • Optimized, proprietary chromosomal microarray (CMA) • Detects large deletions/duplications • “Analog” TV • Optimized, proprietary next-gen sequencing test (whole exome) • Detects single letter changes in • “Digital HD" TV

22. Clinical validation is required • Genetic study conducted in 9,000 individuals • Collaboration with The Children's Hospital of Philadelphia and University of Utah • Two key peer-reviewed manuscripts1,2 • Identified and validated > 50 previously unknown genetic variations that confer a “high risk” for developing ASD • Certain of which have yet to be detected in unaffected individuals Sources: 1Matsunami et al., PLOS ONE., 2013, http://dx.plos.org/10.1371/journal.pone.0052239; 2Matsunami et al., Molecular Autism, 2014, 5:5.

23. Medical guidelines are critical American College of Medical Genetics (ACMG) recommends Chromosomal Microarray (CMA)1: As a first-line test in the initial postnatal evaluation of individuals with the following: • Autism spectrum disorders • Apparently non-syndromic developmental delay/intellectual disability • Multiple anomalies not specific to a well-delineated genetic syndrome Additional supporting recommendations for genetic testing from American Academy of Neurology, American Academy of Pediatrics, and American Academy of Child/Adolescent Psychiatry Source: 1Manning and Hudgins, Genet Med, 2010, 12: 742-745

24. Coding and coverage necessary, but not sufficient • AMA issued CMA code 2013 • AMA issued Next-Gen Sequencing code in 2015 Coding • CMA technology generally viewed as ”Medically Necessary” by a majority of private payers and generally “Covered” • Next-gen sequencing viewed by majority of payers as “Experimental/Investigational” and generally "Not Covered” Coverage X Even with Coding and Positive Coverage, neither payment nor timing of payment is a guarantee Payment

25. Neither guidelines nor policies guarantee payment Revenue growth chart: more established payers Overall impact = new payers take time to reach target revenue of more established payers AND Revenue takes longer to collect from new payers $ Time 18 Months

26. Significant “T and $” to achieve target unit revenue

27. Directed efforts have started to pay off… • 79% CAGR in cash collections from 2013 to 2015 242% 67%

28. But sometimes the best laid plans…get adversarial

29. BioUtah E & I Life Science Summit 2016 Silicon Valley Bank

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34. Underwriting Approaches for Life Science Clients Cash Flow Dependent Balance Sheet Dependent Asset Coverage is Primary Source of Repayment Focus on Liquidity Coverage and Ability to De-Lever Covenants: Min. Adj. Quick Ratio Liquidity Ratio (>1.0) Min. TNW (indirect) Other Terms 0-6 Month Int. Only 24 – 36 Month Amortization Warrants Investor Dependent Ability to Attract Capital is Primary Source of Repayment Focus on Liquidity and Access to Capital Covenants: Min. Revenue (proxy for growing EV) Liquidity Ratio (<1.0x) Other Terms 6-18 Month Int. Only 24 – 36 Month Amortization Warrants • Cash Flow is Primary Source of Repayment • Focus on Volume and Durability of Cash Flow • Multiple Covenants: • Max. Leverage • Min. Fixed Charge • Max. Cap. Ex. • Other Terms • 4-5 Year Repayment Period • Back-end Amortization • Excess Cash Flow Question: How Could A Change In Reimbursement Affect Repayment Source?

35. Sample Diligence Questions – Mol. Dx Company

36. Thank you.