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Executives

Brad Cole – CFO, EVP of Operations, and Secretary

Randy Scott – Chairman and CEO

Kim Popovits – President and COO

Steve Shak – Chief Medical Officer

Analysts

Bill Quirk – Piper Jaffray

Charles Duncan – JMP Securities

Eric Criscuolo [ph] – Thomas Weisel Partners

George Zavoico – Cantor Fitzgerald

Kevin DeGeeter – Oppenheimer & Co.

Scott Gleason – Stephens, Inc.

Sun June [ph] – JP Morgan

Matthew Scalo – Canaccord Adams

Bruce Cranna – Leerink Swann

Genomic Health, Inc. (GHDX) Q3 2008 Earnings Call Transcript November 5, 2008 4:30 PM ET

Operator

Good afternoon. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter Genomic Health conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator instructions) I would now like to turn the conference over to Brad Cole, Chief Financial Officer. Sir, you may begin your conference.

Brad Cole

Thank you. Good afternoon everyone and welcome to Genomic Health’s third quarter 2008 conference call. Before we begin, I would like to remind you that various remarks that we make on this call that are not historical, including those about our future financial and operating results, future plans and prospects, the success of our business strategy, the impact of clinical data on demand for our tests, economic benefits and value to payors of our tests, growth opportunities, future products, product enhancements and our product pipeline, demand for our tests and drivers of demand, payor coverage and progress in patient access, our investment in our product pipeline and commercial organization, clinical outcomes and timing of clinical studies, our growth potential and our expectations regarding our ability to comply with potential FDA regulations, constitute forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our quarterly report on Form 10-Q for the quarter ended June 30, 2008 filed with the SEC, in particular to the section entitled Risk Factors for additional information on factors that could cause actual results to differ materially from our current expectations. These forward looking statements speak only as of the date hereof and we disclaim any obligation to update these forward looking statements.

With that, I will turn the call over to Randy Scott, Chairman and CEO of Genomic Health.

Randy Scott

Thanks, Brad. Good afternoon everyone and welcome. Also joining us today are Steve Shak, our Chief Medical Officer; and Kim Popovits, our President who will be joining the Q&A portion of the call from the East Coast. I will begin by sharing our third quarter accomplishments and commercial progress with you, Brad Cole will then provide you with our third quarter financial results, finally I will close with an overview of the progress we are making with our development programs. As always, we look forward to your questions and comments during the Q&A.

Once again, we saw an increase in product revenue, growth in Oncotype DX tests delivered, and a narrowing of our net loss this quarter. Our year-over-year product revenue grew 78% and test delivered grew 72%. In addition we reduced our net loss to $3 million from over $7 million in last year’s third quarter. More than 10,220 test results were delivered in the third quarter of 2008 compared to more than 5950 in the third quarter of 2007. To date, more than 75,000 recurrent score results have been delivered to patients. We continued to receive increasing numbers of node-positive samples following the launch of our new report in the second quarter of 2008. These results clearly demonstrate the medical community’s increasing support and utilization of Oncotype DX. We attribute our success to the strength of our business model and believe that within today’s economic landscape personalized medicine will prevail as a cost-effective way to shape the future of our healthcare system. This ability to reduce the unnecessary use of costly treatments like chemotherapy will become increasingly important in the context of healthcare reform. Our recent enhancement of Oncotype DX to include quantitative HER2 gene expression scores in all reports is another example of the increased clinical utility and economic value that our tests can provide to physicians, patients and payors.

Given the current economic environment, we are carefully reviewing our goals for 2009 with an emphasis on the continued growth of Oncotype DX in maintaining our strong balance sheet. We anticipate expanding our commercial operations particularly our US sales force early next year. We believe this investment will enhance our ability to provide the highest level of service to our customers reflecting our commitment to make Oncotype DX available to all early stage breast cancer patients. As we approach standard of care in the United States, we believe Oncotype DX has increasing potential abroad. We recently promoted Jim Vaughn, who was previously our Director of US sales in the Western Region to Vice President, European Markets. Jim played an integral role in our commercial success with Oncotype DX in the United States and we believe that his prior experience in Europe and history with the company will allow him to do the same overseas.

We also completed a European study which evaluated the use of Oncotype DX in node-negative and node-positive breast cancer patients treated with the Aromatase inhibitor anastrozole. This study was accepted for oral presentation at the San Antonio Breast Cancer Symposium in December. With new agreements in Australia and Taiwan, we now have 7 international distribution partners and have received samples from 39 countries. Oncotype DX is now included in the updated 2008 guidelines of the Dutch Institute for healthcare improvement.

Finally, we expect sales in Europe to be heavily dependent on reimbursement. We plan to work closely with National Healthcare Systems on a country-by-country basis where Oncotype DX can provide the most value to physicians, patients and payors. We continue to believe that over time the international market will be a strong component of the company’s future growth. As we lead efforts to make personalized medicine a reality for all people faced with cancer, we will continue to invest in our product pipeline and expand our commercial efforts domestically and abroad while working to narrow our net loss.

With this in mind, I will turn the call over to Brad Cole who will review our third quarter financial results.

Brad Cole

Thanks, Randy. Our third quarter revenue was $28.1 million compared to $15.9 million for the third quarter of 2007. Product revenue from Oncotype DX in the quarter was $28.1 million, an increase of 78% compared to $15.8 million for the same period in 2007. Product revenue once again increased at a greater rate than tests delivered year over year reflecting our continued progress in reimbursement. Patient access to Oncotype DX also increased this quarter as we gained coverage for nearly 8 million additional lives bringing the total number of US insured lives covered by policies, contracts and agreements to approximately 89%. Of the remaining lives not yet under policy or contract, the majority are represented by state Medicaid plans. Additionally, as expected, we transferred the processing of Medicare claims to Palmetto GBA this quarter and began receiving payments from Palmetto in September. 52% of product revenue was recorded on an accrual basis and recognized at the time the test results were delivered compared to 31% in the third quarter of 2007. This quarter 45% of our tests delivered were to accrual based payors. Quarter to quarter fluctuation is expected in recorded revenues as still nearly half of all product revenue is recognized on a cash basis. Cost of product revenue was $7.2 million in the third quarter of 2008 as compared to $4.4 million in the third quarter of 2007. Our gross margin on product revenue for the third quarter was again 75% and we expect gross margin rates to remain in this range.

Operating expenses including research and development and selling and marketing and general and administrative expenses were $24.2 million in the third quarter versus $19.6 million in the same period in 2007. This year-over-year increase reflects our continual investment in R&D in commercial operations as well as the increased scale of our business overall. Third quarter operating expenses were relatively lower reflecting the seasonality of our business, Q4 and Q1 are our strongest demand quarters and spending has in the past and will likely in the future be higher in the Q4 and Q1 quarters. Included in Q3 total operating expenses were non-cash charges of $3.6 million including FAS 123 stock-based compensation expense of $2.3 million and $1.3 million of depreciation and amortization expenses.

Net loss in the third quarter of 2008 decreased by almost 60% to $3 million from $7.3 million in the third quarter of 2007. Cash and cash equivalents and investments at September 30, 2008 were $54.4 million compared to $68.4 million at December 31, 2007. Our year-to-date cash burn of $14 million approximates our net loss for the year of $13.8 million. We expect our cash position at December 31, 2008 to be more than $50 million. We remain confident that we will meet our updated guidance for the full year 2008 which we provided last quarter. You can expect us to provide 2009 guidance in February of next year.

I will now turn the call back to Randy.

Randy Scott

Thanks, Brad. Turning to our pipeline I will provide an update on our development programs. In breast cancer, we continue to add value to our existing Oncotype DX assay with the inclusion of quantitative ER, PR and HER2 scores the availability of a node-positive results report and ongoing research with additional breast cancer populations and treatment regimens such as DCIS. Through this work we have accumulated a growing body of clinical evidence which now includes 11 clinical studies in more than 4000 patients as well as multiple treatment impact studies conducted by physicians who use Oncotype DX in clinical practice. As we did with breast cancer, we are pursuing multiple sources of clinical samples around the world in an effort to conduct rigorous and reproduce little studies in other cancers. We have established productive collaborations with renowned organizations such as the National Surgical Adjuvant Breast and Bowel Project, the Eastern Cooperative Oncology Group, the Southwest Oncology Group, and the TransATAC project to obtain the number of quality samples required for successful development of clinically useful gene expression tests.

In colon cancer, we are making excellent progress towards the goal of reporting results of the clinical validation study in 2009. Specifically, we have completed development studies of more than 760 candidate genes in 1851 patients and have selected 18 genes for the Oncotype DX colon cancer assay. The 18 gene assay is in the final stages of analytical validation work which we view as instrumental for successful development. We have received the bulk of clinical trial specimens for the large international clinical validation study which is designed to address the chemical utility of the assay in Stage II colon cancer. Earlier this year, we completed a study on a small group of genes including K-ras in collaboration with Bristol-Myers Squibb and ImClone that could lead to the development of new tests for predicting benefit from certain targeted therapies including Erbitux. We believe this could have an important impact on the treatment of colon cancer since the National Comprehensive Cancer Network now recommends K-ras testing for all patients diagnosed with metastatic colorectal cancer. For our renal and prostate cancer early development programs, we are following the same rigorous clinical development process we established for our breast cancer assay. We are currently working with collaborators to conduct extensive pathology analysis on key clinical specimens; in addition we are working with collaborators to identify additional clinical sample sets necessary to proceed to the next phases of clinical development. We also have several early stage research and development programs in line and other key cancers.

In conclusion, we believe that during a period of soaring healthcare costs, personalized medicine will become an imperative for reshaping the healthcare system. Individualized treatment holds the power to improve clinical outcomes while reducing the cost of healthcare in multiple ways by allowing physicians to identify the optimal therapy and by reducing the number of adverse drug reactions which can be costly and cause serious side effects. Our ability to maintain a strong balance sheet and to narrow our net loss over the past quarter gives us confidence in our business model and long-term prospects. We will continue to invest softly in our pipeline and commercial expansion domestically and abroad working to deliver on our mission to bring the promise of Genomics to clinical practice.

Operator, please now open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bill Quirk with Piper Jaffray.

Bill Quirk – Piper Jaffray

Thank you, good afternoon, can you hear me?

Randy Scott

Yes we hear you, go ahead.

Bill Quirk – Piper Jaffray

A couple of questions, first is given the ongoing delays for the IVDMIA document, is there any way that we could accelerate the time to market for the colorectal cancer test and obviously there is a feeling that everything works in terms of the clinical study or should we continue to essentially expect kind of a second half 2009 launch?

Randy Scott

Yes Bill I think our first priority is always on the quality of the clinical studies themselves. So I don’t think we would ever take a risk on trying to accelerate a study beyond its natural process simply for regulatory issues. So we are going to focus on doing a great study and doing it right. We will likely have the results next year and I think as we have mentioned before, the real impact in terms of our financials won’t be seen for a couple of years. We do expect breast cancer to be the driving force financially for the next several years. So we will move as swiftly and strongly as the science allows but at the same time focus on what we think could be a great quality test for patients.

Bill Quirk – Piper Jaffray

Okay very good, and then just a question on the approach to testing in Europe, are we going to take a similar type of approach, in other words, as samples come in we are going to process them irrespective of reimbursement or would you say that perhaps the focus from a country by country perspective is very much tied to reimbursement, I guess I am trying to get a little bit of handle on the strategy over there, thank you.

Randy Scott

Sure, that is actually a very good point because I think it is very important from the US where in the US we needed to drive adoption in order to help drive reimbursement. In most of the national healthcare systems, you are really not going to see any significant years until you have reimbursement in place. So I think most of the European national healthcare systems and many around the world reimbursement really is the starting point. Now we separately are working and receiving samples now most of this on a patient pay basis, it is not going through a reimbursement process.

Operator

Your next question comes from the line of Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Hi guys, congratulations on a nice quarter despite a seasonally challenging period.

Randy Scott

Thanks Charles.

Charles Duncan – JMP Securities

I had a quick kind of follow-on question in terms of the international launch. I am wondering if you could give us kind of a percentage of samples you are getting now, I am sure it is small but really kind of give us a little more color on the international launch in terms of the timing and the spend behind it as well as what is the implication of the new Dutch guidelines to drive adoption and then the data that is coming out at San Antonio Breast, have you detected an increase in the number of international samples even despite in advance of that data?

Randy Scott

Charles, why don’t I lead off and then Kim can add a little bit. We are of course very excited by the potential for the international markets but as we have seen in the US, the real market is for the reimbursement of tests. The amount of patient paid tests that are coming through are modest and growing. We are very pleased with the growth rates. We also do have strong reimbursement in Israel and so we really like to replicate that experience of success in Israel throughout a number of other European countries but we expect that to take some significant time to work through the national payor systems. We are very pleased to have one of our first large international studies, we have actually already reported one with Luca Gianni in Italy that was published a couple of years ago and now have another significant study that will be presented at San Antonio so we will simply await the results of that before we comment there. So, Kim if you are online, do you want to comment any further on the international opportunity?

Kim Popovits

No, I would just echo probably Randy what you said earlier, we really do see a bit of a difference internationally than we did in the US in terms of the adoption and reimbursement equation and we know that we need to get national coverage in these countries prior to seeing any kind of significant adoptions. So the work that we are doing right now is on singling out that process, getting people to make sure that we can accelerate it as much as possible and then the means what we would expect is increasing use from the patient pay market and clearly the data that will be presented in San Antonio and more of the data that we are able to deliver will be helpful. Yes, we will really need to fall back on the national coverage in each country to be able to build inroads into the market there, so it will take a bit of time.

Charles Duncan – JMP Securities

That makes sense to me, I am not surprised or concerned that it will take some time, I guess my question is, is it going to be similar to the states that it is very much a data driven establishment of reimbursement in terms of clinical utility or is there going to be more concern about some economic benefit, what do you think are going to be the key drivers?

Kim Popovits

I think that Charles the key driver will be the data just as it is here and the fact that we have the practice guidelines here in the United States and we have a fair amount of experience from a number of countries outside the US. The interest level is relatively high so the data I think will drive the day. On the other hand, it will behoove us to make sure that we do put forward a case where there is some economic benefit of Oncotype DX and in those countries where chemotherapy is used quite a bit on these women with early stage breast cancer. So we are looking at all of that.

Operator

Your next question comes from the line of Eric Criscuolo [ph] with Thomas Weisel Partners.

Eric Criscuolo – Thomas Weisel Partners

Hi good afternoon, thank you for taking my questions, just filling in for Peter Lawson today. I guess first off, I would be – the node-positive test revenue that you are seeing, are those significant yet at all to the top line?

Randy Scott

Yes, good question, we are seeing an increase in node-positive use. I think as we have commented previously there is a very strong treatment paradigm in node-positive breast cancer and while the (inaudible) study that we presented at the San Antonio Breast Cancer Conference was very exciting, we want to see that study published which will likely happen we hope sometime next year as always our clinical operators are in control of those publications and timelines and I think it will really require that publication and a lot of thought by the community before will see a dramatic use within the node-positive and even then probably a tendency to work with patients with micro-metastasis in one positive lymph node for example. So we are seeing increase in node positive, it is still very early in reimbursement cycle, we will need publications to work on reimbursement. So I think it is a great upside for the company but the growth will be modest probably over the next couple of quarters.

Eric Criscuolo – Thomas Weisel Partners

Okay thanks. I guess if you could maybe help me understand the dynamic of between the revenues that you record on the accrual basis and the link between your reimbursement status, it was like over 90% of the lives are covered, you are increasing lives by 8 million to 10 million a quarter but cash collection is still about 50% of the revenue, is there any reason why that number is not well and why the accrual basis is still around 50%?

Randy Scott

Yes, let me explain that Eric. It is true that about 90% now of patients’ lives, insured patients’ lives are covered by a policy or a contract or an agreement but only about 50% to 60% of those are covered by a contract. So the process moves from no policy to a policy to a contract and even when it is on contract it requires that the payor pay us well meaning consistently and regularly in a predictable fashion. It usually takes six or so months or even nine months to get all the administrative systems working well to payor. When they reach that point of consistent, reliable payment level then we move it to an accrual basis. So you are seeing a lag and it has been that way for a number of – over the course of the last couple of years. So we have taken a (inaudible) take a conservative approach where they have to be very predictable before they move it over. because once they move over you recognizing it real time and you notice that we have limited bad debts, for example as compared to some other diagnostic companies as a result.

Operator

Your next question comes from the line of George Zavoico with Cantor Fitzgerald.

George Zavoico – Cantor Fitzgerald

Hi everyone, congratulations on a good quarter.

Randy Scott

Thanks George.

George Zavoico – Cantor Fitzgerald

A couple of questions in Europe first, you are going up against (inaudible) that has been for a while. I don’t really have a good idea as to how much of inroads they have made, I suspect it is not very much, and both in regard to patients’ units and ordering and reimbursement, can you describe a little bit of what you are up against there?

Randy Scott

Sure George, in general we don’t talk about specific competitors but I think we do have a number of competitors out there, we expect there will be competition in this field in the future I would have to say that we have really not seen a significant impact at all in our business in the US yet and in internationals zones where we have gone head to head with competitors like in Israel, it has been very similar where we have far and away led the business opportunity. I think that really reflects the 11 clinical studies in over 4000 patients that ASCO guidelines, the NCCN guidelines the strength of that really leads us to believe that Oncotype DX is just a great product that is going to take the lead.

George Zavoico – Cantor Fitzgerald

Okay fair enough. With regard to Europe, I mean there are a lot of countries in Europe, are you targeting the larger markets first and with one cell over there and several countries to go to reimbursement, is that pretty much a one-man operation or you are going to get consultants and folks that are perhaps more in tune with individual country’s policies to help you out?

Randy Scott

Kim, you want to speak about the European opportunity.

Kim Popovits

Yes I know I was just back after one second, one of the things I wanted to mention to you George is you know there is a fair line of experience in Europe in terms of the assays based on the (inaudible) study that is going on there so we know that there are a number of physicians that have had experience using the attendee [ph] assay through the trial and we think that also creates an opportunity for us because of some of the advantages that we believe they will see with Oncotype DX with it not being the first frozen tissue and having the chemotherapy identified with it. So in some respects we think that the knowledge that is there because of the use and the study going on could potentially be helpful and as far as how we are planning to roll out the work that we are doing there, it is not going to be a one-man operation, Jim is in place there to really coordinate and be the person to be accountable for how we place people in the countries that we are going to place them. So right now we are doing an analysis of the largest markets there which you can I am sure imagine the ones they are and we will be looking at putting people in those countries to deal with the reimbursement situation and that will include working with some consultants to get us through the reimbursement process and we have identified who those consultants are and have already started work with them.

George Zavoico – Cantor Fitzgerald

Okay and so what kind of timeline do you think maybe a year to get us to one or two like that or can you provide a little bit more guidance on that regard?

Kim Popovits

Well what I can say is that the timeline for reimbursement, if we look at what we are seeing today can be similar to the US in the sense that it could take a couple of years to get through a national payor decision, now there are some ways to expedite that that we are looking into but in the meantime we still will begin to do spot leader development, potentially do some clinical work in countries where necessary to figure out that landscape as we move towards the national reimbursement so I do think it will take some time, I can’t give you an exact timeframe.

Operator

(Operator instructions) Your next question comes from the line of Kevin DeGeeter from Oppenheimer & Co.

Kevin DeGeeter – Oppenheimer & Co.

Hi good afternoon guys, congratulations on a great quarter. A number of my questions I guess have already been answered here but maybe back on the US reimbursement side here I recognize many of the remaining lives there are not currently covered obviously with Medicaid but I mean can you give us some thoughts as to how we should think about P coverage and kind of how do we target this last portion of the uncovered lives out there?

Randy Scott

Kim, do you want to speak to the Medicaid programs?

Kim Popovits

Yes the Medicaid we will have to do on a state-be-state basis, so we do have our managed care team focused there. It was not initially our top priority as we were going after the major payors for the last couple of years but we are working individually with the state Medicaid plans and have had some success and Brad may want to chime in more on the particular numbers that is a focus for us going forward.

Kevin DeGeeter – Oppenheimer & Co.

Okay great, that is helpful, just one or two housekeeping items, did we have any appreciable validation or sort of pre-launch validation for our colorectal in the quarter, spending on colorectal in the quarter and your view on it?

Brad Cole

We are in the process of finalizing the analytical validation work which we think is a very crucial part of the overall assay we have also began, we have got the bulk of the samples in-house and are beginning the clinical validation studies. So the colon cancer results we will expect next year. Steve, do you want to mention anything else on the colon cancer?

Steve Shak

I think I just want to emphasis that colon cancer program here for us is a major effort. As we did with breast cancer, we are working again with collaborators and getting the best advice to design the studies to provide evidence that would support its clinical utility for Stage II patients. We are again looking at both the ability of the 18 gene assay to look at prognosis as well as treatment selection and we are excited about getting the results.

Operator

Your next question comes from the line of Scott Gleason with Stephens Inc.

Scott Gleason – Stephens, Inc.

Hi guys, thanks for taking my questions. First question, Randy I was wondering if you could maybe talk a little bit about revenue recognized on accrual basis and maybe where directionally that could go when we start looking at 2009?

Randy Scott

Sure, I will interpret this primarily as Bradwick – one of our goals now is to work with each of the individual payors as they put a policy in place to win a contract in place and get all the electronic and systems in place to be able to recognize revenue in real time. So that is a major goal for the company Brad, do you want to add some color on that?

Brad Cole

Sure, it is a relatively slow process but we would expect it would grow over time. A good number of the large payors are already in that category and there is a few others still to come but we would expect that while today we have about 60% in our contract as we are going to move above 60% throughout the course of 2009, we are at 52% today so another 10% or 15% increase. I think there is a point which you can’t go above because there is a number of people that just don’t have coverage or have limited policies in small plans. That is all the guidance I can give at this point.

Scott Gleason – Stephens, Inc.

Okay great, that helps a lot, and then can you guys give a number for tax recognized on accrual basis on the quarter?

Brad Cole

I think the way to answer that question is to really direct you to what do we contract at because it is the contracted payors who are on the accrual basis and all of our contracted payors with maybe one exception, we have single digit discounts off of list price and those list prices vary from $34.60 to $36.50 to now $38.20 because various contracts have been written over the course of the last couple of years. So they are all above $3000 by quite a bit.

Scott Gleason – Stephens, Inc.

Okay and –

Operator

Your next question comes from the line of Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Hi guys, thanks for taking the follow-up. I wanted to ask you a little bit about perm penetration you delivered over 10,000 samples now could you talk some more about penetration in terms of incidents but also more importantly the addressable pool in the state in terms of node-negative breast cancer patients?

Randy Scott

Sure, Kim you want to take that?

Kim Popovits

Hi Charles. It is something that obviously where our focus has been on because we think there is significant opportunity for increasing penetration next year and that is going to be our main focus and the reason why we are increasing the sales force early in the year. We have added clinical utility as a test, a single gene recording the node-positive data helps but even if you look at the node-negative population, we think there is significant room for growth there. We look at the population being in total of about 115,000 in that node-negative ER positive group. Now, over the years we have talked to all of you about how we have kind of cut that back to be conservative for very young patients, older patients, patients with micromeds but as the data is mounting and the clinical evidence supports what we are doing here with Oncotype DX and now that we have the practice guidelines and the reimbursement support we think there is a lot of room to go to penetrate that 115,000 market now. So that does end up being 100,000 or 90,000 I don’t know but it will be greater than where we will end this year certainly. So we are very optimistic about our ability to continue to have growth in the node-negative ER positive population.

Charles Duncan – JMP Securities

When you come across a (inaudible) not using the test in all their patients, really all their addressable patients if you will, what is the biggest pushback and what can you do to drive really standard of care adoption because you are not quite there but I think you will get there but what is it going to take to get there?

Kim Popovits

I think it will take again a greater coverage. If you look at the amount of time that our reps are spending with physicians on a patient-by-patient basis there is a high service concern on it to Oncotype DX not just with the data but with the processing and some of the things that we are doing to expedite the processing are streamlining the ordering, we are doing some logistical things that we think will help ease in the ordering process but the main thing I think is just physicians getting used to the fact that payors are now covering this test keeping in mind that many of our claims are outstanding 12 to 18 months. So physicians still today are working through deals with us so to get the mindset that payors are now paying for this, it is in the practice guidelines, I think that just really we do need to be there more front and centre with our customers and having more reps out there to do that, we have seen that every time we have increased the sales force we have seen growth so we don’t expect it to be different this time. We need to get those reps onboard and get them out there and train and so again, we think with the total market of 115,000 there is significant room for us to be able to continue the growth pattern that we are on.

Operator

Your next question comes from the line of Tycho Peterson with JP Morgan.

Sun June – JP Morgan

Hi this is Sun June [ph] sitting in for Tycho taking the questions. Going back to the IVDMIA guidelines, do you have any additional insight into kind of what the update is on that as far as – do you expect to see any updates before the current administration leaves for example?

Randy Scott

Sure, good question. We have to say we really do not throughout the last couple of years there have been multiple rumors or discussions and quite frankly FDA has been unwilling to comment on a specific timeline and so we really don’t know when or how the FDA plans to move forward and of course that will be important and for us eventual publication of the guidelines whether tomorrow or next week or a year from now really is a start of a process have been going through those guidelines and beginning to understand what the impact is for business and working with the FDA directly on how we now bring those guidelines into our business practices.

Sun June – JP Morgan

Okay and also would you be able to provide more color on the initial customer feedback to the quantitative ER, PR and HER2 add-ons to Oncotype DX?

Randy Scott

Sure, why don’t I give that to Steve Shak, our Chief Medical Office to talk about?

Steve Shak

Yes, I would say generally the addition of ER and PR which has been available now since February so have given us actually a lot of positive feedback. As you know there is growing concern about the accuracy of ER and PR testing in standard practice and the availability now of the quantitative assay with every recurring score in many, many cases we hear gives them confidence in their existing treatment plan and in some cases where there is a lack of certainty on ER status we have actually helped to resolve some of those questions. So that is the case with the ER and PR. With regard to HER2 again it is still early days, the initial interest however in getting our HER2 score was very high and that is why we work so hard in order to make that available in September.

Operator

Your next question comes from the line of Matthew Scalo with Canaccord Adams.

Matthew Scalo – Canaccord Adams

Hi guys, I wanted to ask about the sales force additions in early ’09, can you quantify that for us and then is it simply just parsing out territories or will there be focus on say breast surgeons to kind of fully penetrate order, more completely penetrate like DCIS opportunity?

Randy Scott

Kim?

Kim Popovits

Yes Matthew we are actually adding the reps really to focus on getting the size of the territories to be a little bit smaller so that reps can do what you have suggested, they can spend more time with the oncologists as well as the other members of the team in the oncology practice working through the critical issues, the logistical issues, but also to be able to spend more time with the breast surgeons as they are the first to see the patient and a group that has become increasingly more interested in Oncotype DX and advising their patients on how to use the assay and in fact ordering the assay as well. So we will do both. On the further number of reps, we plan to make a pretty significant increase, so we are looking on the order of 20 or so new reps that are starting the year. As you know, we have 16 in the field right now, so a substantial increase and we are pretty excited about the type of candidates that we are talking to right now and we think we will really be able to get in there and penetrate these territories better if we can increase the coverage in each area.

Matthew Scalo – Canaccord Adams

Okay, terrific and I wanted to ask maybe Brad as far as the sequential drop in sales and marketing understanding seasonality here but was there marketing spend that maybe was cut back per se in sometimes summer looking forward to second half of this year or should we just kind of expect it to go back to maybe just $12 million to $12.5 million per quarter going forward?

Brad Cole

Yes I think Matt you have nailed it, you are exactly right. During the summer quarter there are less programs with our physicians and educational programs as you might expect as doctors are away from their practice. Some of the effect that we see on demand, seasonality also affects kind of how we go about spending. It actually has not been seen in our financial results over the last three years because we have been always in a process of expanding the sales force during this quarter and this is the first year that we haven’t expanded the sales force here seeing the seasonality effect of our marketing spend as well. So you should expect it to go back to the $12 million range or so in the fourth quarter.

Operator

Your next question comes from the line of Bruce Cranna with Leerink Swann.

Bruce Cranna – Leerink Swann

Hi good afternoon everyone.

Brad Cole

Hi Bruce.

Bruce Cranna – Leerink Swann

Sorry if I missed this Brad but did you mention the accrual percentage in the quarter by volume versus –

Randy Scott

Yes, listen Bruce.

Bruce Cranna – Leerink Swann

I am sorry.

Brad Cole

Yes it was 45%.

Bruce Cranna – Leerink Swann

45%

Brad Cole

The stay in revenue was 52%, this changed a little bit from the prior quarters to up a little tick but it was 45% of volume and 52% of revenue.

Bruce Cranna – Leerink Swann

Okay and then just quickly on Medicaid because it seems to be kind of interesting is kind of the last holdout, can you just I guess go through a little bit for us how you might go at that payor, is it for a run of state basis or can you really I guess do the carriers get involved or how do you really get that moving?

Kim Popovits

It is a state by state basis so we will continue to work with the states individually and of course we will start where we have the larger Medicaid populations and that is how we are prioritizing the work that we are doing right now.

Bruce Cranna – Leerink Swann

Do you have to get involved with the carriers or is that not part of it?

Kim Popovits

Eventually yes but you start with the state, Medicaid programs and then you end up include the carriers to get things implemented.

Bruce Cranna – Leerink Swann

Then Brad, this is kind of I guess a detailed question but thinking about the reserve that is out there, the back-dated portion, is it then fair to assume that I guess with every passing quarter that reserve is getting more skewed towards Medicare or Medicaid rather?

Brad Cole

Medicaid actually is a pretty small part of the volume but yes Medicaid has not been paying so that they are becoming a little bit bigger portion of the total but it is not I would not say significant.

Bruce Cranna – Leerink Swann

Alright, thank you.

Operator

Your next question comes from the line of George Zavoico with Cantor Fitzgerald.

George Zavoico – Cantor Fitzgerald

Hi, thanks for taking my follow-up and excuse me I think the moderator was a little bit over enthusiastic and cut me off in my sentence there.

Randy Scott

Finally hear from you again George.

George Zavoico – Cantor Fitzgerald

I am sorry about that just one follow-up question, regarding K-ras, this is a tremendous opportunity and I think there is a lot of interest among other diagnostic developers here but I guess is somewhat dependent on what happens between Bristol-Myers and ImClone and now Lilly I guess as to how this moves forward because your tests identify a much broader gene expression profile for both K-ras mutants and K-ras wild-type, can you provide a little bit more guidance on how this is going to develop into a product.

Randy Scott

Sure. I think you got it pretty much right. K-ras identifies a subset of colon cancer patients who are unlikely to respond to Erbitux and that is now moving into guidelines basically worldwide. What that still leaves open is the question of the remaining individuals which are most likely to respond to Erbitux and that is the question that we think we have good strong early data in collaboration with Bristol-Myers and ImClone of identifying an additional gene set that further targets Erbitux to a group of patients who are very highly probable to respond. So with ImClone Lilly merger we will be working with those groups as they go through the merger towards what the next steps are but we continue to be very positive about the potential for a way to target Erbitux in a fashion that would really allow you to expand its application into earlier stages of cancer in a very targeted fashion.

George Zavoico – Cantor Fitzgerald

Okay, great, thank you very much.

Operator

Your next question comes from the line of Kevin DeGeeter with Oppenheimer.

Kevin DeGeeter – Oppenheimer

Yes, thanks for taking the follow-up here, I just had a general question here with regard to the market in Europe and more specifically your thoughts on whether or not a targeted acquisition and perhaps partnership you are seeing more of the acquisition would kind of help accelerate that process and might make some strategic sense here?

Randy Scott

Yes, that is a good question and in general we believe that a lot of the infrastructure that we have built for personalized medicine is still fairly unique, that it is not the traditional diagnostics route nor is it the traditional therapeutics route, so we would always be open to opportunities that we thought would allow us to accelerate in a prudent way of the development of our business but quite honestly we have just not found in most cases that the infrastructure components that are there in many of these companies would warrant acquisitions versus simply partnering and so we have a number of partnerships and distribution agreements internationally and we will continue to look at all options but I do think just like in the US there is nobody who cares more about our tests than us in developing the right infrastructure to do that is something that we have internally that really is not very broadly held in these early days of personalized medicine.

Kevin DeGeeter – Oppenheimer

Good thanks for the clarification.

Operator

Your next question comes from the line of Scott Gleason with Stephens Inc.

Scott Gleason – Stephens, Inc.

Hi guys, thanks for taking my follow-up, Randy just one more question on the colon cancer product, are we going to receive any kind of interim data points prior to kind of the final validation data or is it just the kind of validation data the first thing we will really hear from a results standpoint?

Randy Scott

Yes that is correct, we won’t be nor would it be our practice to release any kind of intermediate data or progress.

Scott Gleason – Stephens, Inc.

And then Randy can you talk real quick about the efforts you guys are making to ensure that that trial would support a PMA commission also for the FDA if required?

Randy Scott

You know we can’t really speak to that until we know what exactly the guidance guidelines are going to be and what FDA position will be. So I think the best that we can do today is to work very closely with the international community in the colon cancer space to design the best quality clinical trials and programs to answer their questions and of course the regulatory path is something that we will be working with as the guidance comes to fruition and we get more information around that.

Scott Gleason – Stephens, Inc.

Okay, thank you very much.

Randy Scott

Thank you for participating in today’s call and for your continued interest in Genomic Health. We look forward to seeing some of you at the upcoming San Antonio Breast Cancer Symposium in December.

Operator

This concludes today’s third quarter Genomic Health conference all. You may now disconnect.

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Source: Genomic Health, Inc. Q3 2008 Earnings Call Transcript
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