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As filed with the Securities and Exchange Commission on October 23, 2007

Registration No. 333-            

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

XDX, INC.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)		   8071
(Primary Standard Industrial
Classification Code Number)		   94-3316839
(I.R.S. Employer
Identification Number)

3260 Bayshore Boulevard
Brisbane, CA 94005
(415) 287-2300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)

Pierre Cassigneul
President and Chief Executive Officer
XDx, Inc.
3260 Bayshore Boulevard
Brisbane, CA 94005
(415) 287-2300
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:
Michael J. Danaher   Charles K. Ruck
David J. Saul   R. Scott Shean
Wilson Sonsini Goodrich & Rosati   Latham & Watkins LLP
Professional Corporation   650 Town Center Drive, 20th Floor
650 Page Mill Road   Costa Mesa, California 92626
Palo Alto, CA 94304   (714) 540-1235
(650) 493-9300   Fax: (714) 755-8290
Fax: (650) 493-6811    

        Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this Registration Statement.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

Title of Each Class of
Securities to be Registered

   Proposed Maximum
Aggregate
Offering Price(1)

   Amount of
Registration Fee(2)
Common Stock, $0.001 par value per share   $86,250,000   $2,648
(1)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes $11,250,000 of shares that the underwriters have the option to purchase to cover over-allotments.

(2)
Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

Subject to Completion, Dated October 23, 2007

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

    Shares

GRAPHIC

Common Stock

        XDx, Inc. is offering                shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $        and $        per share.

        We intend to apply to have our common stock approved for listing on the NASDAQ Global Market under the symbol "XDXI."

        Investing in our common stock involves risks. See "Risk Factors" beginning on page 8 of this prospectus.

 
   Per Share
   Total
Initial public offering price   $                $             
Underwriting discounts   $                $             
Proceeds, before expenses, to XDx, Inc.   $                $             

        We have granted the underwriters the right to purchase up to an additional                shares of common stock to cover over-allotments.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares to purchasers on                        , 2007.

JPMorgan   Morgan Stanley


Piper Jaffray
 
JMP Securities

                        , 2007


TABLE OF CONTENTS

 
   Page
Prospectus Summary   1
Risk Factors   8
Special Note Regarding Forward-Looking Statements   28
Use of Proceeds   29
Dividend Policy   29
Capitalization   30
Dilution   32
Selected Financial Data   34
Management's Discussion and Analysis of Financial Condition and Results of Operations   36
Business   52
Management   74
Principal Stockholders   93
Related Party Transactions   96
Description of Capital Stock   98
Shares Eligible for Future Sale   102
Material United States Federal Tax Consequences for Non-United States Holders of Our Common Stock   104
Underwriting   107
Legal Matters   111
Experts   111
Where You Can Find More Information   111
Index to Financial Statements   F-1

        You should rely only on the information contained in this prospectus and any free-writing prospectus that we authorize to be distributed to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from or in addition to that contained in this prospectus or any related free-writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial conditions, results of operations and prospects may have changed since that date.

        "XDx" and "AlloMap" are our registered trademarks. AlloMap HTx, AlloMap LTx and the XDx logo are our unregistered trademarks. This prospectus contains other trade names and service marks which are the property of their respective owners.

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PROSPECTUS SUMMARY

        This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including "Risk Factors" beginning on page 8 and the financial statements and related notes, before making an investment decision. As used in this prospectus, references to "we," "our," "us" and "XDx" refer to XDx, Inc. unless the context requires otherwise.

Our Business

        We are a molecular diagnostics company focused on the discovery, development and commercialization of noninvasive gene expression-based tests for the monitoring of transplant rejection and autoimmune diseases, which we refer to collectively as immune-mediated conditions. We focus on immune-mediated conditions that require life-long monitoring and testing to avoid, or to quickly respond to, serious complications. We launched our first commercial test, the AlloMap HTx molecular expression test, in January 2005. Physicians use this test to monitor heart transplant recipients for acute cellular rejection. We are in the process of developing our second gene expression-based test, the AlloMap LTx molecular expression test, to monitor for acute cellular rejection in lung transplant recipients. We are also engaged in designing a clinical study to create a gene expression test to monitor for disease flares in patients affected by systemic lupus erythematosus, or lupus. We intend to pursue tests to monitor other immune-mediated conditions with significant unmet medical needs with the goal of making our genomic-based tests standard diagnostic procedures.

        The AlloMap HTx test is an objective, multi-gene molecular diagnostic test that measures the level of gene expression in a processed blood sample to help determine whether a heart transplant recipient is rejecting the transplanted heart. Results of this test are reported as a numerical score which quantifies the probability that the heart transplant recipient is not experiencing acute cellular rejection. We believe the use of our test, in conjunction with other clinical indicators, may help physicians and patients avoid unnecessary surveillance biopsies and may help physicians determine whether the dosage of potentially harmful immunosuppressive drugs could be reduced. The AlloMap HTx test is being used by approximately 50 of the approximately 190 U.S. heart transplant management centers. We are actively seeking to increase usage in these centers and expand use to other transplant centers. All AlloMap HTx tests are processed in our laboratory in Brisbane, California and, as of September 30, 2007, we have performed over 6,700 tests.

        We adhere to a rigorous process of discovery, development, verification and commercialization in developing our tests. In this effort, we work with leading treatment centers to gather tissue and blood samples from patients, which we use to identify and validate gene expression patterns that correlate with a particular immune-mediated condition. Our AlloMap HTx test arose from our Cardiac Allograft Rejection Gene Expression Observational, or CARGO, study. We are currently engaged in the CARGO II study, which is an observational study designed to confirm and extend the results of the original CARGO study in an international population, and our Invasive Monitoring Attenuation through Gene Expression, or IMAGE, study, which is intended to demonstrate the noninferiority of our AlloMap HTx test to biopsies in the routine monitoring of stable heart patients. For the development of our AlloMap LTx test, we are utilizing patient specimens derived from our Lung Allograft Rejection Gene Expression Observational, or LARGO, study. Our clinical development approach for the AlloMap LTx test is very similar to that which we used in developing the AlloMap HTx test.

        The current list price for our AlloMap HTx test is $2,950. We have been successful in achieving reimbursement from several payors, including National Heritage Insurance Company, or NHIC, the California Medicare designated contractor, which has provided reimbursement for the AlloMap HTx

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test for Medicare claims submitted since the beginning of 2006. Tests performed on hospital or transplant center inpatients have always been, and will continue to be, billed directly by the hospital or transplant center. Effective January 1, 2008, we will bill NHIC directly only for tests performed on blood specimens collected from Medicare patients that are not registered as hospital outpatients at the time of collection. If we are unable to reach agreement with a transplant center to collect blood specimens in a manner that would allow us to continue to directly bill NHIC, and the transplant center declines to assume billing responsibility for tests performed on inpatients and outpatients, we expect to establish our own patient service centers, or engage third-party clinical laboratories in the vicinity of such transplant centers to collect blood specimens. This would also preserve our ability to continue to bill Medicare directly for our AlloMap HTx test. We believe that NHIC's reimbursement decisions and our growing body of clinical data, including nine peer-reviewed journal articles regarding our AlloMap HTx test will provide support for other payors to use in coverage and reimbursement decisions. We continue to educate physicians and hospital administrators regarding the potential economic benefits of our AlloMap HTx test, which may include a reduction in the number of costly biopsies, immunosuppressive drug therapies and rejection related complications.

Monitoring Patients with Immune-Mediated Conditions

        Immune-mediated conditions are caused by undesired immune-system activities, referred to as "rejection" in the context of transplants and disease activity or "flares" in the context of autoimmune diseases like lupus. For most immune-mediated conditions, including rejection in heart and lung transplants and flares in lupus, it is difficult to monitor and anticipate rejection or disease activity in an accurate and noninvasive manner. Current approaches to monitoring patients with immune-mediated conditions include a combination of techniques, including physical examinations, x-rays, magnetic resonance imaging or MRIs, organ function tests and biopsies, each of which has its own advantages and limitations.

        Heart transplant monitoring.    The United Network for Organ Sharing, or UNOS, reports that there are approximately 18,800 heart transplant recipients living in the United States, with approximately 2,100 new heart transplants per year. According to the Organ Procurement and Transplant Network, or OPTN, approximately 40% of all heart transplant patients reject their new heart at least once in the first year after their transplant, and a lesser percentage thereafter. The standard for heart transplant monitoring has been to diagnose rejection by heart biopsy, known as endomyocardial biopsy, or EMB. Patients typically undergo an average of one routine EMB per month in the first year post-transplant, and at a declining rate thereafter. However, EMBs involve invasive outpatient surgical procedures to remove tiny portions of the transplanted tissue for analysis that may or may not accurately reflect rejection activity taking place elsewhere in the heart, and rely on subjective visual interpretation by pathologists of tissue samples. Due to these and other limitations, EMBs can result in adverse side effects and fail to detect rejection activity at an early stage or mistakenly identify rejection where none exists.

        Lung transplant monitoring.    The OPTN reports that the number of lung transplants in the United States has risen significantly to over 1,400 in both 2004 and 2005, up from the prior three-year average of approximately 1,100. A lung transplant patient is typically seen an average of 12 times during the first year following transplant for routine monitoring and testing, due to the higher risk of rejection and infection in the early stage, and at a declining rate thereafter. Surveillance techniques for lung transplant recipients include biopsies of the transplanted lung, bronchoalveolar lavage or fluid collection, chest X-rays and pulmonary function testing, each of which has its own advantages and disadvantages and none of which provide a complete monitoring solution. Lung biopsies are uncomfortable for the patient and have limitations similar to EMBs.

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        Lupus monitoring.    As reported in the May 1998 issue of Arthritis & Rheumatism, lupus affected an estimated 239,000 people in the United States. Stable lupus patients in the United States visit a physician about four times per year and experience, on average, one hospitalization every two years. Lupus is an expensive disease to manage. Current methods for monitoring disease activity in lupus patients rely on techniques that include measuring elevated levels of antibodies in the blood and have proven unreliable in clinical practice to date.

The XDx Solution

        Our AlloMap HTx test and tests under development are designed to deliver the following key benefits:

    •
    Clinically Actionable Information:    personalized information regarding an individual's immune system status that can be used by physicians, in conjunction with other clinical indicators, to inform patient treatment decisions;

    •
    Objective Results:    a single numerical score each time a test is performed, which allows physicians to objectively monitor changes in the patient's immune system activity over time;

    •
    Noninvasive Tests:    tests performed using a sample of the patient's peripheral blood; and

    •
    Quality Control and Rapid Turnaround:    all tests are processed at our own laboratory to provide consistent quality and ensure timely turnaround.

Our Strategy

        Our goal is to improve the quality of management and treatment of patients with immune-mediated conditions by providing individualized information through gene expression analysis. Key elements of our business strategy include:

    •
    Providing High Clinical Value:    by developing and delivering gene expression diagnostics that provide useful and timely information to physicians and patients faced with difficult treatment decisions;

    •
    Pursuing Broad-Based Adoption:    by increasing usage at current customer transplant centers and by physicians currently using our AlloMap HTx test and engaging additional physicians and treatment centers through the use of education, ongoing clinical studies and additional peer reviewed publications;

    •
    Continuing to Establish Reimbursement:    by educating leading public and private payors regarding the value of our tests, by supporting ongoing studies and peer reviewed publications involving our tests and by increasing patient and physician demand;

    •
    Applying Our Test Development Process to Other Immune-Mediated Conditions:    by applying our test development process to other immune-mediated conditions, starting with AlloMap LTx test for lung transplant recipients and a test for monitoring flares in lupus patients; and

    •
    Enhancing the AlloMap HTx Test and Our Test Development Process:    by evaluating additional patient populations and exploring other uses of test results to improve treatment planning.

Risks Associated with Our Business

        Our business is subject to numerous risks discussed more fully in the section entitled "Risk Factors" immediately following this prospectus summary. We are an early stage company with a history of losses, and we expect to incur net losses for the foreseeable future. If third-party payors do not provide adequate reimbursement for our AlloMap HTx test or any future tests we develop, our commercial success could be compromised. New test development involves a lengthy and complex

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process, and we may not be successful in our efforts to develop and commercialize additional diagnostic tests. Complying with numerous regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties. Effective January 1, 2008, we will no longer bill directly for a test performed on a Medicare patient who has been registered as an outpatient, which could adversely affect the adoption of our test, our success in obtaining adequate reimbursement and our results of operations. We believe that recently issued draft Food and Drug Administration, or FDA, guidance will, once finalized, require us to seek FDA clearance or approval for our AlloMap HTx test and any future tests in order to market such tests in the United States, which we may be unable to obtain in a timely and cost-effective manner, or at all.

Our Corporate Information

        We were originally incorporated in Delaware in December 1998 under the name Hippocratic Engineering, Inc. In June 2002, we changed our name to Expression Diagnostics, Inc. and in July 2007, we changed our name to XDx, Inc. Our principal executive offices are located at 3260 Bayshore Boulevard, Brisbane, CA 94005, and our telephone number is (415) 287-2300. Our website address is www.xdx.com. The information on, or that may be accessed through, our website is not incorporated by reference into this prospectus and should not be considered a part of this prospectus.

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The Offering

Common stock offered by us               shares

Common stock to be outstanding after this offering
 
            shares

Over-allotment option
 
            shares

Use of proceeds
 
We intend to use the net proceeds of this offering to expand our infrastructure and personnel in sales and marketing and research and development, to fund research and development programs for current and future tests, including our clinical studies, to expand our facilities and operations, and for working capital and other general corporate purposes. We may also use a portion of the proceeds to expand our current business through acquisitions of or investments in other complementary businesses, products or technologies. See "Use of Proceeds" for additional information.

Proposed NASDAQ Global Market symbol
 

XDXI

        The number of shares of our common stock that will be outstanding immediately after this offering is based on 27,843,437 shares outstanding as of June 30, 2007 and assumes the issuance by us of shares in this offering. The number of outstanding shares excludes:

    •
    1,146,252 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2007, at a weighted average exercise price of $0.40 per share;

    •
    750,474 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2007, on an as-converted basis and at a weighted average exercise price of $3.59 per share; and

    •
    6,888,923 shares of common stock expected to be available for future issuance under our stock incentive plans upon completion of this offering, including 2,388,923 shares available for future issuance under our 1998 Stock Plan as of June 30, 2007 and including 4,500,000 shares that will become available under our 2007 Equity Incentive Plan upon completion of this offering.

        Except where we state otherwise, the information we present in this prospectus reflects:

    •
    the conversion of all of the outstanding shares of our preferred stock into 24,372,203 shares of common stock upon completion of this offering;

    •
    the conversion of all outstanding preferred stock warrants to common stock warrants;

    •
    amendments to our certificate of incorporation and bylaws to be effective upon completion of this offering; and

    •
    no exercise by the underwriters of their over-allotment option.

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Summary Financial Data

        The following tables summarize our financial data for the periods presented. The summary statement of operations data for each of the years ended December 31, 2004, 2005 and 2006, except for the pro forma net loss per share and pro forma weighted average number of shares data, are derived from our audited financial statements included elsewhere in this prospectus. Except for the pro forma net loss per share and pro forma weighted average number of shares data, the summary statement of operations data for the six months ended June 30, 2006 and 2007 and the summary balance sheet data as of June 30, 2007, have been derived from our unaudited financial statements, which are included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected for any future periods. Our operating results for the six months ended June 30, 2007 may not be indicative of expected results for the full year. You should read this data together with the financial statements and related notes appearing elsewhere in this prospectus, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the other financial information included elsewhere in this prospectus.

 
   Year Ended December 31,
   Six Months Ended
June 30,
  
 
   2004
   2005
   2006
   2006
   2007
  
 
   (In thousands, except share and per share data)

  
Revenues:                                
  Testing revenue   $ —   $ 179   $ 2,922   $ 229   $ 3,972  
  Contract revenue     —     148     20     —     —  
   
 
 
 
 
 
    Total revenues     —     327     2,942     229     3,972  
   
 
 
 
 
 

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Cost of testing     —     1,650     2,770     1,225     2,152  
  Research and development     9,526     8,848     12,261     6,081     7,646  
  Selling and marketing     1,692     3,737     5,067     2,408     3,752  
  General and administrative     1,799     2,349     3,049     1,493     2,273  
   
 
 
 
 
 
    Total operating costs and expenses     13,017     16,584     23,147     11,207     15,823  
   
 
 
 
 
 

Loss from operations
 
 
(13,017
)
 
(16,257
)
 
(20,205
)
 
(10,978
)
 
(11,851
)

Interest expense
 
 
(78
)
 
(104
)
 
(412
)
 
(27
)
 
(704
)
Interest income     57     197     832     440     424  
Other income (expense), net     (2 )   (241 )   (83 )   (18 )   297  
   
 
 
 
 
 

Net loss before cumulative effect of change in accounting principle
 
 
(13,040
)
 
(16,405
)
 
(19,868
)
 
(10,583
)
 
(11,834
)
Cumulative effect of change in accounting principle     —     (238 )   —     —     —  
   
 
 
 
 
 
Net loss   $ (13,040 ) $ (16,643 ) $ (19,868 ) $ (10,583 ) $ (11,834 )
   
 
 
 
 
 

Net loss per share — basic and diluted:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net loss per share before cumulative effect of change in accounting principle
 
$
(12.26
)
$
(9.04
)
$
(7.97
)
$
(4.51
)
$
(4.14
)

Cumulative effect of change in accounting principle
 
 
—
 
 
(0.13
)
 
—
 
 
—
 
 
—
 
   
 
 
 
 
 
Net loss per share — basic and diluted   $ (12.26 ) $ (9.17 ) $ (7.97 ) $ (4.51 ) $ (4.14 )
   
 
 
 
 
 
Weighted average shares outstanding used in calculating net loss per share — basic and diluted     1,063,335     1,814,151     2,494,284     2,345,743     2,860,443  
   
 
 
 
 
 
Pro forma net loss per share — basic and diluted               $ (0.91 )       $ (0.52 )
               
       
 
Pro forma weighted average shares outstanding used in calculating net loss per share — basic and diluted                 21,874,182           23,516,151  
               
       
 
(1)
Please see Note 4 to our financial statements for an explanation of the method used to calculate historical and pro forma basic and diluted net loss per common share.

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   As of June 30, 2007
 
   Actual
   Pro Forma(1)
   Pro Forma As
Adjusted(2)
 
   (In thousands)
Balance Sheet Data:                  
  Cash, cash equivalents and short-term investments   $ 28,007   $ 28,007   $  
  Working capital (current assets less current liabilities)     21,167     21,167      
  Total assets     35,719     35,719      
  Long term debt, net of current portion     4,247     4,247      
  Convertible preferred stock warrant liability     2,324     —      
  Convertible preferred stock     93,957     —      
  Accumulated deficit     (78,380 )   (78,380 )    
  Total stockholders' equity (deficit)     (76,906 )   19,375      
(1)
On a pro forma basis to give effect to the automatic conversion of all of the outstanding shares of our convertible preferred stock into 24,372,203 shares of our common stock upon the completion of this offering, and the reclassification of the convertible preferred stock warrant liability to stockholders' equity (deficit).

(2)
On a pro forma as adjusted basis to give effect to the transactions described in footnote (1) above and our sale of            shares of common stock in this offering at an assumed initial public offering price of $        per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses, and the application of the net proceeds from those shares. Each $1.00 increase (decrease) in the assumed public offering price of $        per share, the mid-point of the range on the front cover of this prospectus, would increase (decrease) each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders' equity by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million shares in the number of shares offered by us would increase each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders' equity by approximately $       million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us would decrease each of cash, cash equivalents and short-term investments, working capital, total assets and total stockholders' equity by approximately $       million. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.

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RISK FACTORS

        An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below before making a decision to buy our common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes.

Risks Related to Our Business

We are an early stage company with a history of losses, and we expect to incur net losses for the foreseeable future.

        We have incurred substantial net losses since our inception, and we expect to continue to incur additional losses in future years. For the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2007, we had a net loss of $13.0 million, $16.6 million, $19.9 million and $11.8 million, respectively. From our inception through June 30, 2007, we had an accumulated deficit of $78.4 million. In recent years, we have incurred significant costs in connection with the development of the AlloMap HTx test. Our research and development expenses were $9.5 million, $8.8 million and $12.3 million for the years ended December 31, 2004, 2005 and 2006, respectively. We expect our research and development expense levels to remain high for the foreseeable future as we devote our resources primarily to continue commercializing our existing AlloMap HTx test and to develop future tests and our technology platform. We do not expect our losses and expenses to be substantially mitigated by revenues from our AlloMap HTx test or future tests, if any, for a number of years. Even if we achieve significant revenues, we may never become profitable.

Our financial results for the foreseeable future depend on sales of one test, our AlloMap HTx test, and we will need to generate sufficient revenues from this and other tests to run our business.

        We launched our AlloMap HTx test in January 2005 and expect that the sales of our AlloMap HTx test will account for substantially all of our revenue for the foreseeable future. We are in the process of developing our AlloMap LTx test for lung transplant patients, and are in the discovery phase of a test for patients with Systemic Lupus Erythematosus, or lupus. Although we estimate the commercialization of our AlloMap LTx test to begin in 2009, we may not be able to commercialize this test or other tests on the timelines expected, if ever. If we are unable to increase sales of our AlloMap HTx test or successfully develop and commercialize other tests or test enhancements, our revenues and our ability to achieve profitability would be impaired, and the market price of our common stock could decline.

If physicians and hospital administrators do not adopt our tests, we will not achieve future sales growth.

        Physicians and healthcare administrators are traditionally slow to adopt new products, testing practices and clinical treatments, partly because of perceived liability risks and the uncertainty of third-party reimbursement. It is critical to the success of our sales efforts that we educate a sufficient number of physicians, clinicians and administrators about our AlloMap HTx test and our future tests, if any, and demonstrate the clinical benefits of these tests. We believe that physicians and centers will not use our tests unless they determine, based on published peer-reviewed journal articles and experience of other physicians, that our tests provide accurate, reliable and cost-effective information that is useful in monitoring immune-mediated conditions.

        We estimate that there are approximately 190 centers managing heart transplant recipients in the United States. Our AlloMap HTx test has been used by less than one-third of these centers, and not all

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target physicians in these centers are currently using our test. In order for our AlloMap HTx test sales to grow, we must continue to market to and educate physicians and administrators at treatment centers that have used our test to increase the number of physicians ordering our test, the number of patients tested and the number of tests per patient. In addition, we must actively solicit additional treatment centers to establish policies and procedures for ordering our test and to encourage physicians at those centers to incorporate our test into their standard clinical practice. Some of the challenges that our sales team must overcome include explaining the clinical benefits of genomics, which is the foundation of our test, communicating the features of a highly technical product which requires the user to understand the statistical underpinnings of our test, and changing a 30-year patient management paradigm of using endomyocardial biopsy as the basis of transplant patient monitoring. If physicians and hospital administrators do not adopt our tests, our business and financial results will suffer.

Effective January 1, 2008, we will no longer bill directly for tests performed on Medicare patients that are registered as hospital outpatients at the time of their blood specimen collection, which could adversely affect the use of our test, our success in obtaining reimbursement and our results of operations.

        The Centers for Medicare & Medicaid Services, or CMS, has determined that our AlloMap HTx test must be billed by the treating hospital or transplant center to its respective local Medicare contractor in situations where the blood specimen for our test is collected while the Medicare beneficiary is registered as a hospital outpatient. Tests performed on hospital or transplant center inpatients have always been, and will continue to be, billed directly by the hospital or transplant center. This means that we will be unable to bill directly for most of our AlloMap HTx tests unless the treating hospital or center changes its practice of collecting blood specimens. Based on our discussions with CMS, we sent a letter to CMS in September 2007 to confirm that:

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    There will be a transition period through December 31, 2007, during which we will be permitted to continue billing NHIC directly for tests performed on all transplant center outpatients;

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    Effective January 1, 2008, transplant centers will be required to bill their local Medicare contractor for any AlloMap HTx test performed on a blood specimen collected from a Medicare beneficiary during a transplant center visit when other services are provided by the center to the patient;

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    We can continue to bill NHIC directly for tests performed on blood specimens collected while the beneficiary is a "nonpatient," with the term "nonpatient" including any beneficiary whose blood specimen collection occurs at the transplant center at a time when no other services are provided to the beneficiary by the transplant center or whose blood specimen is collected outside the transplant center by non-center personnel.

        We have not yet received, nor do we expect to receive, formal written confirmation from CMS of the approach set forth in our September 2007 letter. If CMS, at some point in the future, provides us with additional guidance that narrows the definition of a "nonpatient" beyond our current understanding, our ability to bill NHIC directly for tests may be limited, our operations disrupted, and our operating results adversely affected.

We may be unable to reach agreement with some of our transplant center customers for collecting blood specimens in a manner that would allow us to directly bill our local Medicare contractor and the transplant center may decline to assume billing responsibility, in which case, we expect to establish our own patient service centers or engage third-party clinical laboratories in the vicinity of such transplant centers, which may result in significant additional costs to us.

        Our existing contracts with transplant centers regarding sample processing and billing of the AlloMap HTx test must be amended to ensure that we and the transplant center are in compliance with CMS's recent determination. Contract amendment discussions are in the early stages and involve

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approximately 60 separate contracts and we cannot predict if and when transplant centers currently under contract with us or newly engaged transplant centers will agree to our proposed terms. In certain instances, we may be unable to reach agreement with a transplant center for collecting blood specimens in a manner allowing us to directly bill NHIC for nonpatients, or the transplant center may decline to assume billing responsibility altogether. In these instances, we believe we will have to establish our own patient service centers, or engage third-party clinical laboratories in the vicinity of such transplant centers, for purposes of drawing, processing and shipping blood specimens to our Brisbane, California laboratory. This will take time to implement and, if implemented, may result in significant additional costs to us. If transplant centers must bill Medicare for our test, they may also insist on billing other third-party payors for our test as well, leading to further uncertainty over reimbursement.

        Because of the above factors, during this transition period while we and each of our customers are determining how our test will be performed and billed in the future, there will be significant uncertainty surrounding:

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    the extent to which our customers change their practice of collecting blood specimens for our test, or, instead, assume direct responsibility for seeking reimbursement for the test;

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    the number of patient service centers we will have to open and the cost of both opening and maintaining such centers;

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    whether regional Medicare contractors in addition to NHIC, will provide coverage and reimbursement for our test, the timing of those determinations, and the extent of coverage and reimbursement they will provide.

If a customer is unable or unwilling to change its practice of collecting blood specimens for our test, and reimbursement has not been established in that customer's region, it is possible that the customer will stop collecting, processing and shipping blood specimens for our test, at least until adequate coverage and reimbursement can be obtained. Accordingly, in the near term, it will be difficult for us to predict our future operating performance based upon our historic results of operations.

If third-party payors do not provide adequate coverage and reimbursement for our tests, the commercial success of our tests could be compromised.

        Favorable third-party payor coverage and reimbursement are essential to meeting our immediate objectives and long term commercial goals. The current list price of the AlloMap HTx test is $2,950 per test, although average reimbursement rates are typically lower and vary by payor. Physicians and patients may decide not to use the AlloMap HTx test or any of our future tests unless third-party payors, including managed care organizations and governmental payors such as Medicare and Medicaid, pay all or a substantial portion of the costs for the test. There is significant uncertainty concerning third-party coverage and reimbursement of any new technology, including the AlloMap HTx test. We do not recognize revenue for test results delivered without a contract for reimbursement, or an established coverage policy and a history of payment. Revenue for such tests is recognized only when these tests are actually paid for. We delivered approximately 2,100 AlloMap HTx test results in 2006 and recognized revenue for approximately 1,100 tests; some of which were for test results delivered prior to 2006. For the first six months of 2007, we delivered approximately 2,500 AlloMap test results and recognized revenue for approximately 1,500 tests; some of which were for test results delivered prior to 2007. Coverage and reimbursement by a third-party payor may depend on a number of factors, including a payor's determination that our current and future tests are:

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    not experimental or investigational,

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    medically necessary,

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    appropriate for the specific patient,

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    •
    cost-effective, and

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    supported by peer-reviewed publications.

        Since each payor makes its own decision as to whether to establish a policy to reimburse for a test, seeking payor coverage and other approvals is a time-consuming and costly process. We cannot assure you that adequate coverage and reimbursement for the AlloMap HTx test or future tests will be provided in the future by any third-party payor.

        To date, some large private payors have denied coverage for our test at a policy level based in part on the belief that the AlloMap HTx test is experimental or investigational. We have not yet received coverage at a policy level from any third-party payor. We continue to work with payors to seek such coverage and to appeal denial decisions based on existing and ongoing studies, peer reviewed publications, support from physician and patient groups and the growing number of AlloMap HTx tests that have been reimbursed by public and private payors. CMS has not developed a national coverage or reimbursement policy that would be binding on all of its contractors with respect to the AlloMap HTx test. This means that Medicare contractors, like NHIC, currently may continue to develop their own coverage and reimbursement policies with respect to our technology. There are no assurances that the current policies will not be modified in the future. If our test is considered on a policy-wide level by major third-party payors, whether at our request or on their own initiative, and our test is determined to be ineligible for coverage and reimbursement by such payors, our collection efforts and potential for revenue growth could be severely impacted.

Transplant centers may not adopt our test due to historical practices or due to more favorable reimbursement policies associated with other means of monitoring heart transplants.

        Due to the historically limited monitoring options and the well established coverage and reimbursement for biopsies, physicians are accustomed to monitoring for acute cellular rejection in heart transplant recipients by utilizing biopsies. Physicians may use our test in parallel with biopsies rather than as an alternative to biopsies, which would result in an increase in overall cost of monitoring. Furthermore, if treatment center administrators view our test as an alternative to a biopsy and believe they would derive more revenue from the performance of biopsies, such administrators may be motivated to reduce or avoid the use of our test. We cannot provide assurance that our efforts will increase the use of our test by new or existing customers. Our failure to increase the frequency of use of our test by new and existing customers would adversely affect our growth and revenues.

New test development involves a lengthy and complex process, and we may not be successful in our efforts to develop and commercialize additional diagnostic tests.

        A key element of our strategy is to discover, develop, verify and commercialize a portfolio of new diagnostic tests in addition to our AlloMap HTx test. We have engaged in discovery and development activity for our AlloMap LTx test and we are currently in the discovery phase for a test to monitor lupus flares. We plan to devote considerable resources to the research and development of these tests as well as other potential diagnostic tests. There can be no assurance that our current or future tests will be capable of reliably monitoring organ transplant rejection in other types of organs or testing for autoimmune diseases. In addition, before we can successfully develop diagnostic tests for other organ transplants and autoimmune diseases and commercialize any new tests, we will need to:

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    conduct substantial research and development;

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    conduct clinical validation studies;

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    expend significant funds;

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    develop and scale-up our laboratory processes;

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    •
    expand and train our sales force;

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    pursue a larger number of smaller medical centers across a more dispersed geographic area;

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    seek and obtain FDA clearance or approval of those tests that are subject to regulation by the FDA as medical devices; and

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    if our current test or any future tests become subject to FDA regulation, obtain the required FDA clearances or approvals.

        This process involves a high degree of risk and takes several years. Our test development efforts may fail for many reasons, including:

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    failure of the test at the research or development stage;

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    difficulty in accessing testing samples, especially testing samples with known clinical results;

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    lack of clinical validation data to support the effectiveness of the test; or

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    failure to obtain necessary FDA clearances or approvals to market the test in the United States.

        Few research and development projects result in commercial products, and success in early clinical trials often is not replicated in later studies. At any point, we may abandon development of our AlloMap LTx test, our test for the monitoring of lupus flares and other test candidates, or we may be required to expend considerable resources repeating clinical trials, which would adversely impact the timing for generating potential revenues from those test candidates. If in the course of development of a particular test, we are unable to confirm a panel of target genes whose expression correlates with a particular clinical outcome, we must either return to earlier phases of test development, as we have done in the past with both the AlloMap HTx test and the AlloMap LTx test, and repeat our gene screening process on existing or new samples, or abandon development of such test. In addition, as we develop tests, we will have to make significant investments in marketing and selling resources. If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study, we would likely abandon the development of the test or test feature that was the subject of the clinical trial, which could harm our business.

If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our tests may be delayed and, as a result, our stock price may decline.

        From time to time, we may estimate and publicly announce the anticipated timing of the accomplishment of various clinical and other product development goals, which we sometimes refer to as milestones. The actual timing of these milestones could vary dramatically compared to our estimates, in some cases for reasons beyond our control. We cannot assure you that we will meet our projected milestones and if we do not meet these milestones as publicly announced, the commercialization of our tests may be delayed and, as a result, our stock price may decline.

The field of gene-based molecular diagnostics is in its early stages and is subject to rapid technological change. If we are unable to develop tests to keep pace with rapid medical and scientific change, our operating results would be harmed.

        The field of gene-based molecular diagnostics is in its early stages. Although there have been few advances in technology relating to organ rejections in patients, the market for medical diagnostic companies is marked by rapid and substantial technological development and innovations which could make our current test, and tests in development, obsolete. We must continually innovate and expand our test offerings to address unmet needs in monitoring immune immediated conditions. If we are unable to demonstrate the effectiveness of our test and future tests, if any, compared to new methodologies and technologies, then sales of our tests could decline, which would harm our revenues.

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If we are unable to support demand for our test, our business may suffer.

        We began the commercialization of the AlloMap HTx test in January 2005 and we have limited experience in processing our test and even more limited experience in processing large volumes of tests. If demand for the AlloMap HTx test increases, we will be required to implement increases in scale and related processing, customer service, billing and systems process improvements, and to expand our internal quality assurance program to support testing on a larger scale. We will also need additional certified laboratory scientists and other scientific and technical personnel to process our tests. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available. Failure to implement necessary procedures or to hire the necessary personnel could result in higher cost of processing or an inability to meet market demand. Since we have limited experience handling large volumes of AlloMap HTx tests, there can be no assurance that we will be able to perform tests on a timely basis at a level consistent with demand. If we encounter difficulty meeting market demand for the AlloMap HTx test, our reputation could be harmed and our future prospects and our business could suffer.

If we are unable to compete successfully, we may be unable to increase or sustain our revenues or achieve profitability.

        Currently, our principal competition for our commercial test and tests under development comes from existing diagnostic methods utilized by pathologists, which in the case of transplant rejection, generally involve evaluating biopsy samples to determine the presence or absence of rejection. We are not aware of any other molecular diagnostic tests currently on the market for monitoring autoimmune conditions. However, the field of gene-based molecular diagnostics is in its early stages. New and well established companies are devoting substantial resources to the application of molecular diagnostics to the treatment of medical conditions. Some of these companies may elect to develop and market molecular diagnostic tests for immune-mediated conditions. For example, two privately-held development stage companies, SensiGen and StageMark, have announced an intention to develop molecular diagnostic tests for certain immune-mediated conditions, including lupus.

        Our potential competitors may have widespread brand recognition and substantially greater financial and technical resources and development, production and marketing capabilities than we do. We also compete with emerging companies, such as Cylex, that offer tests or have conducted research relating to cell-mediated immunity. Others may develop lower-priced, less complex tests that could be viewed by physicians and payors as functionally equivalent to our test, which could force us to lower the current list price of our test and impact our operating margins and our ability to achieve profitability. If we are unable to compete successfully against current or future competitors, we may be unable to increase market acceptance for and sales of our commercial test and pipeline tests, which could prevent us from increasing or sustaining our revenues or achieving profitability and could cause the market price of our common stock to decline.

We will be collecting additional data to confirm and extend the results of our original CARGO study and demonstrate the noninferiority of the AlloMap HTx test. It will be expensive to generate such data and any data that is generated may not be positive or consistent with our existing data, which would affect the rate at which our AlloMap HTx test is adopted.

        Our CARGO II study, which is currently underway, is intended to confirm and extend the results of our original CARGO study in an international population. Additionally, our IMAGE study is intended to demonstrate the noninferiority of the AlloMap HTx test compared to biopsies in the routine monitoring of stable heart transplant patients. We cannot provide any assurance that the data collected from these studies will be favorable or, even if favorable, be compelling to the medical community. If the results obtained from our CARGO II and IMAGE studies are inconsistent with our

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previous CARGO study, or fail to demonstrate the clinical benefits of our test relative to biopsies, adoption of our test would suffer and our business would be harmed.

        In addition, the implementation and administration of the CARGO II and IMAGE studies are resource intensive. Our management may be required to devote significant efforts to monitor the studies. If the data generated by the studies is not positive or consistent with our existing data, the studies may never provide any benefit to our business and we would have lost the opportunity to spend the resources dedicated to them on other projects.

Our research and development efforts will be hindered if we are not able to contract with third parties for access to tissue and blood samples.

        Our clinical development relies on our ability to secure access to biopsy and blood samples from the same patient, as well as information pertaining to their associated clinical outcomes. Furthermore, the studies through which our tests are developed benefit most from access to multiple samples from the same patient over a period of time as opposed to samples at a single point in time or archived samples. Others have demonstrated their ability to enroll patients and obtain study samples, thereby competing with us for access. Access to patients and samples on a real-time, or non-archived, basis is limited and often on an exclusive basis. Additionally, the process of negotiating access to patients and samples is lengthy since it typically involves numerous parties and approval levels to resolve complex issues such as usage rights, institutional review board approval, patient consent, privacy rights and informed consent of patients, publication rights, intellectual property ownership and research parameters. If we are not able to negotiate access to patients and tissue samples with hospitals and collaborators, or if other laboratories or our competitors secure access to these samples before us, our ability to research, develop and commercialize future tests will be limited or delayed.

If we cannot maintain our current clinical relationships and enter into new ones, our test development could be delayed.

        We rely on and expect to continue to rely on clinical collaborations and relationships to develop new tests and evaluate our existing AlloMap HTx test. For example, in February 2007 we entered into an agreement with the University of Minnesota to exclusively license key intellectual property assets in the field of lupus. The license relates to the use of gene expression to assess the disease status of lupus patients. We also entered into a separate agreement with the University of Minnesota and The Feinstein Institute that provides us with access to lupus patient samples collected through a National Institutes of Health-funded collaborative program to identify biomarkers of autoimmune diseases. If any of our clinical relationships were to terminate, the research, development or commercialization of the tests contemplated by the collaboration could be delayed or terminated. If any of our collaboration agreements are terminated, or if we are unable to renew those collaborations on acceptable terms, we would be required to seek alternative collaborations. We may not be able to negotiate additional collaborations on acceptable terms, if at all, and these collaborations may not be successful.

        In the past, we have entered into clinical trial collaborations or observational studies with highly regarded organizations in the transplant and immune-mediated and inflammatory disease fields, including the Cleveland Clinic Foundation, Columbia University and Stanford University. Our success in the future depends in part on our ability to enter into agreements with other leading organizations in the fields of transplant and immune-mediated and inflammatory diseases. This can be difficult due to internal and external constraints placed on these organizations. Some organizations may limit the number of collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative and related infrastructure to enable collaborations with many companies at once, which can extend the time it takes to develop, negotiate and implement a collaboration. Additionally, organizations often insist on retaining the rights to publish the clinical data resulting from the collaboration. The publication of clinical data in peer-reviewed

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journals is a crucial step in commercializing and obtaining coverage and reimbursement for tests such as ours, and our inability to control when, if ever, results are published may delay or limit our ability to derive sufficient revenues from any test that may result from a collaboration.

        From time to time we expect to engage in discussions with potential clinical collaborators which may or may not lead to collaborations. We cannot guarantee that any discussions will result in clinical collaborations or that any clinical studies which may result will be enrolled or completed in a reasonable time frame or with successful outcomes. Once news of discussions regarding possible collaborations become known in the medical community, regardless of whether the news is accurate, failure to announce a collaborative agreement or the entity's announcement of a collaboration with an entity other than us may result in adverse speculation about us, our tests or our technology, resulting in harm to our reputation and our business.

If we are unable to raise additional capital on acceptable terms in the future, it may limit our ability to develop and commercialize new tests and technologies.

        We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercial operations and research and development activities. Specifically, we may need to raise additional capital to, among other things:

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    sustain commercialization of our initial test or enhancements to that test;

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    increase our selling and marketing efforts to drive market adoption and address competitive developments;

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    expand our clinical laboratory operations;

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    develop new tests for immune-mediated conditions;

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    fund our clinical validation study activities;

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    expand our research and development activities;

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    acquire or license technologies; and

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    finance our capital expenditures and general and administrative expenses.

        Our present and future funding requirements will depend on many factors, including:

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    the level of research and development investment required to develop an AlloMap LTx test, our potential test for monitoring lupus flares and additional tests;

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    costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

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    our need or decision to acquire or license complementary technologies or acquire complementary businesses;

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    the extent to which we must establish our own patient service centers or enter into agreements with third-party clinical labs to collect, process and ship blood specimens to our Brisbane, California laboratory for testing;

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    changes in test development plans needed to address any difficulties in commercialization;

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