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Genomic Health, Inc. (NASDAQ:GHDX)

Q4 2008 Earnings Call

February 3, 2009 4:30 pm ET

Executives

Dean Schorno – Vice President of Finance

Kimberly Popovits – President & Chief Executive Officer

Brad Cole – Chief Operating Officer & Chief Financial Officer

Analysts

Bruce Cranna – Leerink Swann

Charles Duncan – JMP Securities

Scott Gleason – Stephens Inc.

David Clair – Piper Jaffray

Eric Criscuolo – Thomas Weisel Partners

Raymond Myers – Emerging Growth Equities

George Zavoico – Westport Capital Markets

Kevin Degeeter – Oppenheimer & Co.

Operator

Please standby, we are about to begin. Good afternoon. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to Genomic Health’s fourth quarter and year-end 2008 financial results conference call. After the prepared remarks, there will be a question and answer session. This call is being recorded.

I would now like to turn the call over to Mr. Dean Schorno, Vice President of Finance. Sir, you may begin your conference.

Dean Schorno

Thank you. Good afternoon everyone and welcome to Genomic Health’s fourth quarter and year-end 2008 financial results conference call. I'm pleased to be joining the team for our quarterly financial calls. 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 payers of our tests, growth opportunities, future products, product enhancements and our product pipeline, demand for our tests and drivers of demand, payer 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, our plans for international expansion, the impact of the economy on our business, and our expectations regarding our ability to comply with potential FDA regulation, 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 September 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’ll turn the call over to Kim Popovits, President and CEO of Genomic Health.

Kimberly Popovits

Thanks, Dan. Good afternoon everyone, and welcome. As most of you know, we’ve recently announced some management team changes. Randy Scott, formerly our Chairman and CEO, is now full-time Executive Chairman. And I have taken on the role of President and CEO. Randy joins us today, as well as Brad Cole, who is now our Chief Operating Officer and continues to serve as Chief Financial Officer. Steve Shak, our Chief Medical Officer. Joffre Baker, our Chief Scientific Officer and Dean Schorno, our new Vice President of Finance are also with us.

These management changes mark an important milestone for the company reflecting our success and leadership in delivering personalized medicine to patients. Additionally, we expanded our Board in late 2008 to include Ginger Graham, who has expertise in developing and commercializing successful products for pharmaceutical and medical device companies. We believe that with these changes, Genomic Health is well positioned for growth and expansion in the future.

I'm very pleased today to review this past year with you, as it was one of the significant progress and achievement for Genomic Health and demonstrates how we are continuing to turn the promise of Genomics into the practice of medicine. In 2008, we met or exceeded each of the metrics we set as guidance at the beginning of the year.

In the fourth quarter of 2008, we once again saw an increase in product revenue, growth in Oncotype DX test delivered, and a narrowing of our net loss. For the full year 2008, our revenue grew 73% and test delivered grew 62%.

In addition, we reduced our full year net loss to $16.1 million from more than $27 million in 2007, a 41% decrease. Of note, today we believe that we received more breast cancer samples than any other clinical laboratory in the world. Further, as we add to the clinical utility and economic value that our tests can provide to physicians, patients and payers. We realize we must expand our infrastructure to maintain and enhance this valuable service.

As such, we are making a significant increase in our U.S. sales force taking it from 60 reps to 80 as of January. We have demonstrated the impact in physician adoption of Oncotype DX where we have sales rep coverage. By expanding the sales force now, we believe we can reach the nearly 50% of women in the U.S. with node-negative breast cancer, who currently are not benefiting from information provided by our service.

In addition, we believe a larger sales force will allow us to educate physicians about the potential value that Oncotype DX can provide to certain node-positive breast cancer patients. Beyond the sales force, we continue to refine our systems and improve the ways that we communicate with physicians and patients. We continued the expansion of our online physician portal with enhanced real-time delivery of patient results to physicians, as well as the capability for placing Oncotype DX orders online.

With these investments, we are decreasing the time it takes to get information to and from providers and enhancing the ease at which physicians can use the information in their treatment planning. In addition, we are committed to ensuring that patients around the globe have the same access to the information that Oncotype DX provides to women in the United States. To support our international efforts, we are establishing a subsidiary in Geneva, Switzerland, and have dedicated 10 people to our international efforts including new leadership in Europe, and Asia.

To-date, we have received test samples from 40 countries and have completed or initiated multiple international studies including ATAC and QUASAR. As we have mentioned before, and like our experience in the U.S., we expect sales in Europe to be heavily dependent on reimbursement. As such this will be our key area of focus in Europe over the next several years.

I will now turn the call over to Brad Cole to discuss our adoption and reimbursement progress and review our 2008 financial results. Finally, I will return with comments about our pipeline and outlook for 2009. As always, we look forward to your questions and comments during the Q&A. Brad?

Brad Cole

Thanks Kim. Last year’s excellent results by all measures demonstrate that Oncotype DX is becoming standard of care in helping physicians and early stage breast cancer patients make individual treatment decisions. In 2008, we delivered more than 39,600 test results. In the fourth quarter alone, more than 10,500 tests were delivered, compared with more than 7,200 tests in the fourth quarter of 2007, representing a 47% year-over-year growth rate.

As of December 31, 2008, more than 85,000 Recurrence Score results have been delivered. We believe that the single-digit sequential growth rate in tests delivered in the fourth quarter affirms our decision this past fall to expand physician coverage, as we have not added to the U.S. sales force in the past 18 months.

As Kim mentioned, we believe this expansion, which was completed in January will serve to address the significant opportunity remaining as we’ve seen with prior sales force additions. In 2008, total revenue was $110.6 million, compared with $64 million in 2007. For the full year of 2008, gross margin was 75% compared with 72% for 2007. This steady improvement in our gross margin was as predicted achieved primarily due to continued progress and reimbursement and subsequent growth in revenues.

Once again revenue growth outpaced the growth in tests delivered, as a revenue yield per test increased year-over-year. The net loss for the full year of 2008 was $16.1 million, down from $27.3 million last year. Patient access to Oncotype DX increased steadily in 2008, as we gained coverage through contracts, policies and agreements for an additional $56 million lives, bringing coverage to more than 90% of U.S. insured lives.

Additionally, in the fourth quarter we established a contract with the Blue Cross Blue Shield Association, which we believe will lead to additional coverage with non-contracted Blue Cross Blue Shield plans many of which have policies in place. In addition, late in 2008 we negotiated contract renewals with several insurers at higher prices than the original agreements, as a result of price increases that we have begun to take annually.

Now, turning to our quarterly financial results. Total revenue was $31.2 million in the fourth quarter of 2008, compared with $19.3 million in the same period of 2007. Product revenue from Oncotype DX in the quarter was $30.9 million, an increase of 60%, compared with $19.3 million for the same period in 2007. Product revenue once again increased at a greater rate than test delivered year-over-year reflecting our continued progress and reimbursement and diligence in securing payment for previously uncovered tests.

45% of tests delivered were recorded on an accrual basis in the fourth quarter of 2008. Approximately 50% of product revenue in the fourth quarter was recorded on an accrual basis and recognized that the time the tests were delivered, compared to 45% in the fourth quarter of 2007.

Importantly, our gross margin on product revenue for the fourth quarter increased to 76% above the full year rate of 75%. The company’s net loss decreased to $2.3 million in the fourth quarter of 2008, compared to a net loss of $6 million in the fourth quarter of 2007. Included in fourth quarter 2008 operating expenses were non-cash charges of $3.8 million.

Cash and cash equivalents and investments at December 31, 2008 were $56.7 million, up $2.3 million from $54.4 million at September 30, 2008 and compares with $68.4 million at December 31, 2007. The increase in cash at year-end as compared with September 30 is primarily a result of improved accounts receivable balances, and the timing of payments from payers.

Looking ahead in 2009, we intend to make the necessary investments to expand worldwide commercialization of the Oncotype DX breast cancer assay, in advance our research and development pipeline, while moving our organization toward profitability over the course of 2009. To-date, we believe that we have not seen any significant impact of the weakened economy on our business, but we will continue to monitor the situation closely.

The following is our financial guidance for the full year ending December 31, 2009. We anticipate the test results delivered will approximate a range of $50,000 to $53,000. And we have the processing capacity in place that exceeds this anticipated unit demand. This test delivery guidance assumes continued penetration in the U.S. of the node-negative breast cancer market, and increasing usage among node-positive breast cancer patients as well as international growth.

We are estimating revenue in 2009 to be between $148 million, and $160 million, which represents a growth rate of between 34% and 45%. We expect a net loss in 2009 of $7 million to $14 million. It is important to note, we anticipate that the majority of the annual net loss guidance will be realized in the first half of the year, as we continue to invest in our product pipeline, U.S. sales force expansion and worldwide commercial infrastructure. In fact, as has been highlighted a significant investment has already been made here early in first quarter with the addition to the U.S. sales force and ramping up of our international investment.

I’ll now turn the call back to Kim.

Kimberly Popovits

Thanks, Brad. Turning to our pipeline, I’ll provide an update on our development programs and then close my comments with our areas of focus for 2009. We presented four breast cancer studies at the San Antonio Breast Cancer Symposium in December.

One that I will highlight with an oral presentation of results from a large, contemporary study of breast cancer patients in Europe confirming that along with other traditional measures such as tumor size, Oncotype DX independently contributes to providing a more complete picture of prognosis for node-negative and node-positive patients treated with aromatase inhibitors as hormonal therapy.

This study is particularly important, as previously the Recurrence Score results had been studied in patients treated with tamoxifen monotherapy. Additionally, we found that there is as expected a group of patients with one to three positive node that do well when treated with aromatase inhibitors alone with a likelihood of recurrence only slightly greater than that for node-negative patients.

Further, in this study population, the Recurrence Score identified a group of node-positive patients with four or more positive nodes that had aggressive disease suggesting these patients should be separated out and treated aggressively. During the past year, physicians have informed us that they have found the Recurrence Score to be very useful for certain node-positive patients.

We believe the new data presented at San Antonio adds to the suite of studies that establish the clinical utility of Oncotype DX and are now focused on expanding patient access through our work with payers to amend their polices to include all appropriate node-positive patients.

We believe a cornerstone of our success and a key differentiator for Genomic Health is the extensive clinical evaluation conduced to validate the Oncotype DX breast cancer assay. This now includes 12 clinical studies in more than 4,000 breast cancer patients. Employing the process, we established in breast cancer, we are pursuing multiple sources of other cancer samples around the world an effort to conduct rigorous and reproducible studies in other tumor types.

Accordingly in colon cancer, we have recently initiated an independent clinical validation study in stage II colon cancer for our 18-gene Oncotype DX colon cancer assay and are studying tumor specimens for more than 1,200 patients in the international QUASAR trial, which examined the benefit, associated with adjuvant chemotherapy.

Unlike the Oncotype DX breast cancer assay that captures both recurrence and treatment benefit in one Recurrence Score, the prognostic and predictive genes in the colon cancer assay do not overlap. It is an 18-gene panel; there are seven prognostic genes, six predictive genes for determining the response to 5FU/leucovorin and 5-reference genes.

As such, this colon cancer assay was designed to generate both of prognostic colon cancer Recurrence Score and a predictive colon cancer Treatment Score. Researchers will evaluate the association of the Recurrence Score with recurrence in stage II colon cancer patients treated with surgery alone. They will also evaluate the association of Treatment Score with the magnitude of chemotherapy benefit and patients treated with 5FU/leucovorin chemotherapy. We anticipate reporting results of the study in the second half of 2009.

In addition to colon cancer, we have a promising pipeline that will give us an opportunity to continue to leverage the investments we have made in our R&D capabilities over the past few years. Key areas of focus this year, our pipeline programs in breast, prostate and renal cancers.

We have established collaborations to conduct key clinical analysis in renal and prostate cancers for gene identification studies. We also have several early stage programs and other cancers. We made excellent progress in 2008 and are excited about the prospects for continuing growth in 2009. We look forward to building shareholder value by increasing our product revenue, while reducing our net loss, which will allow us to continue investing and delivering on the promise of personalized medicine.

Thank you for joining us today. Operator, I will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Bruce Cranna with Leerink Swann.

Bruce Cranna – Leerink Swann

Good afternoon.

Brad Cole

Hi, Bruce.

Unidentified Company Representative

Hey.

Brad Cole

Hi Bruce.

Bruce Cranna – Leerink Swann

Hey Brad. You mentioned the accrual revenue rate in the quarter was 50%. Was that, remind me last quarter was it 52% and if so, why is that slipping sequentially?

Brad Cole

You’re right Bruce. Last quarter, it was just over 50% and this quarter it’s right at 50%. This was a particularly strong quarter on recognizing revenue from cash payers, and with test volume where it was; the cash payers were just of higher mix.

Bruce Cranna – Leerink Swann

Okay.

Brad Cole

So it changed by about 2%. It’s a good thing.

Bruce Cranna – Leerink Swann

Okay. Can you make any comments on the backlog size thereof or any comments at all?

Brad Cole

Backlog continues to be significant, and that is the source of half of our revenue. So, to the extent that we continue to build from more than we collect and that’s been the case over the last, well since launch and that will continue to be significant.

Bruce Cranna – Leerink Swann

Okay. And then, if you don’t mind a little clarity on the ’09 guidance, I am just trying to make the model work. If, we’re looking at $7 to $14 million net loss, but yet I think your comment was as mostly in the first half. But yet, I am trying to figure out if, do you expect the revenue or the test volume to be somewhat linear throughout the year or more or less to reflect I guess kind of pacing from ’08. It kind of looks like something really had to be dialed down on the expense side in the back half of the year. In other words, most of the spending in first half, so I guess…

Brad Cole

I think the answer is that we’ve invested in the U.S. sales force here in the first quarter, and in international investments. So there will be a step function increase in expenses early in the year and revenue will catch up with that later in the year.

Bruce Cranna – Leerink Swann

And, but so, you would be dialing down any expenses in the second half?

Brad Cole

No.

Bruce Cranna – Leerink Swann

Okay. All right, thank you. I will get back in queue.

Operator

We will take our next question from Charles Duncan, JMP Securities.

Charles Duncan – JMP Securities

Hi, folks, good afternoon, and congratulations on a good quarter.

Kimberly Popovits

Thanks Charles.

Charles Duncan – JMP Securities

I had a question on IVDMIA I have heard varying kind of perspectives on that. I know, we shouldn’t anticipate any formal action, but what is your current view. I thought that it had been through OMB and now with the change in administration perhaps that has been tabled?

Kimberly Popovits

Yeah, what we know Charles is that it did not pass under the Bush administration, where it sits or where it may go a difficult for us to project that. What I can say, however, is that we were encouraged as we worked through the year and through the issues with many of the stakeholder groups, and it certainly appeared as though, the folks in Washington at HHS and FDA in OMB clearly start some of the issues that we have highlighted as a group and you know I think that’s probably why the guidance didn’t move forward under the administration and this now gives us an opportunity to work with the new administration and some of the players that we had already been working with to formulated solution that, we think it will more appropriate for these new tools and all I believe are going to be very important to further personalize medicine and deal with all the issues around healthcare reform.

Charles Duncan – JMP Securities

Thanks, Kim. I had a followup question with regard to the European data that you presented at San Antonio. I was actually there. I was impressed. I talked to some physicians who were impressed as well. But have you seen that start to really kind of drive some sample flow, I know it was right at the end of the quarter. So obviously, it couldn’t impact financial performance. But, how quickly is that being taken up by, call it international sites and are you starting to get more sample flow internationally?

Kimberly Popovits

We are seeing an increase in the number of node-positive samples that we get, which wasn’t surprising in that. There was a lot of interest around this particular issue. Many oncologists believing that there was this group of patients with one to three positive nodes that likely we are not getting the benefit from chemotherapy that they felt that they should. So, yes, well we have seen an increase, the data was very well received, and certainly is enhancing our efforts as we start to expand internationally. But keep in mind our main focus right now outside the U.S is really on securing reimbursement and working through the landscape to do that. So I think it will be sometime before we were able to work through those issues and, but we will continue to focus on that data both there and here for node-positive patients.

Charles Duncan – JMP Securities

So, U.S. physicians had no troubles translating that data into their own practice.

Kimberly Popovits

Well, maybe ask Steve to give his opinion, but I don’t know that the data was necessarily surprising. It was confirming to something that they had believed already. Do you want to?

Steve Shak

Yeah, I think we got a lot of positive feedback that clearly it was very encouraging, and not unexpected that we saw again that the Recurrence Score works for patients treat with tamoxifen. It was also very, very reassuring to see that in a modern, contemporary population now treated with an aromatase inhibitor, but again that’s a Recurrence Score again it could be very relevant to treatment practice.

Charles Duncan – JMP Securities

Thanks Steve, and Kim. I’ll back in the queue.

Operator

We will take our next question from Scott Gleason, Stephens.

Scott Gleason – Stephens Inc.

Hey, Kim, Brad thanks for taking my questions. I guess the first question you talked a little bit about a Geneva, Switzerland subsidiary in Europe. Can you maybe talk about, maybe some of the CapEx assumptions for next year associated with that?

Brad Cole

Sure Scott. There is a really limited CapEx associated with what we’re doing in Europe. It’s really a building relationship with key opinion leaders and working through reimbursement processes with government payers. We’re not establishing anything in the way of a laboratory facility what have you. So, the CapEx associated with international operation is very limited at least in 2009.

Scott Gleason – Stephens Inc.

Great. And then Brad, you guys saw some very favorable gross margin trends this quarter. I imagine most of that’s based on favorable pricing. Is there anything else here beyond that or can you maybe give a little more granularity there?

Brad Cole

It was primarily driven by pricing but we’ve seen the cost to process a test come down somewhat overtime, and it’s continue to come down, but just not dramatically, its mainly driven by yield on the revenue in the reimbursement side.

Scott Gleason – Stephens Inc.

Okay. And that kind of 77% range is that a good assumption going forward – I am sorry 76%?

Brad Cole

Scott, I think we reported 76% in the fourth quarter.

Scott Gleason – Stephens Inc.

Yes, that’s…

Brad Cole

Yeah, we reached the 77% range. So we are not really providing guidance around gross margin, but we are comfortable in the mid 70s.

Scott Gleason – Stephens Inc.

Okay, and then just one last question. Kim, can you maybe talk about the actual number of sales force ads in the quarter, where you stand now. And then maybe some color on where that number could go throughout the rest of the year?

Kimberly Popovits

Yeah, I’m actually - we are very excited, we increased the sales forces substantially and we brought the reps on in the fourth quarter they were trained in early January. So they are out now in their territories very experienced group. And then one thing I think Brad noted in his comments each time we have increased the sales force, we have seen a pretty significant bump from their efforts out there, and we have become more and more convinced of the high service component to the sales. So we have been titrating carefully, watching the numbers closely, I have been very impressed with the market statistics that our operations group has enabled to gather, so that we know exactly, where this remaining 50% of business is. We have enabled to target those reps directly to that business and it’s our belief that 80 should serve us well for quite sometime into the future. Of course, we will have to take into account launching of second product at some point in time. But again we will continue to watch it closely, but our guess would be that the 80 will be good for this year and we’re looking forward to the same the traction of these reps get quickly in their territories where we will be able to spend more time with each physician.

Scott Gleason – Stephens Inc.

Okay, thanks Kim. And then maybe just one last quick question. Kim, can you maybe just remind us a little bit about seasonality as that you guys see, kind of a quarter-to-quarter basis and then talk next year about maybe how that would imply in terms of some of the timing of actual test shipments.

Kimberly Popovits

Right. So the seasonality that we’ve seen over the past four years or so that predominantly has been in the summer month. So it’s the Q3 timeframe. We see a little bit around the spring break timeframe and that’s been consistent year-over-year. So I would expect that we would continue to see that this year as well.

Scott Gleason – Stephens Inc.

Okay, great. Thanks for taking my questions.

Kimberly Popovits

Welcome.

Operator

We will take our next question from David Clair, Piper Jaffray.

David Clair – Piper Jaffray

Hi, congratulations on a great quarter.

Kimberly Popovits

Thanks David.

David Clair – Piper Jaffray

All right, just a quick question on node-positive in the quarter, where is that still below 5% or we are seeing increased traction there?

Brad Cole

It’s still in single digits, but we are seeing increased traction and it’s been a nice uptick.

David Clair – Piper Jaffray

So greater than 5.

Brad Cole

Yes.

Kimberly Popovits

Well, I want to take an opportunity here, though, to remind folks that while we are seeing increased traction with node-positive. But keep in mind we have work to do still here with the payers. So, while we may see more assays come in, and we need to focus now on bringing the clinical data to the payers to get their policies expanded to this group.

David Clair – Piper Jaffray

So, what’s behind the larger cash pay percentage in the quarter?

Kimberly Popovits

I don’t.

Brad Cole

Well, partly I mean it’s getting pretty – we’re getting pretty in the weeds in terms of details here, but node-positive tests or none of them were booked on an accrual basis. So the revenue we are receiving from node-positive is on lag basis or like cash basis. So you are right that does haven’t affect on the mix, and there is node-positive gross and if we were to grow more rapidly than node-negative – it would [offer slow] small base it is, you’ll see that have a spectrum mix with such a small percentage now it has a very little way in fact on the mix.

David Clair – Piper Jaffray

Okay, and then just a quick question on guidance. You said in your commentary, increased penetration, node-positive increase there and international growth as well. Would you be willing to kind of give us some expectations on the international contribution for ’09?

Brad Cole

In sense of test delivered is that what you are looking for?

David Clair – Piper Jaffray

Sure.

Brad Cole

International has been single-digits and we expect that we’ll continue to be that size as the business overall is growing quite rapidly. So, we are not expecting huge growth this year, but I think it’s the outer years beyond this year that we expect to see the more growth. It’s going to grow, but I wouldn’t say that, we’re going to provide much guidance beyond that, it’s pretty small still.

David Clair – Piper Jaffray

Do you think it would be kind of a similar ramp to when you launched in the U.S.

Brad Cole

No.

David Clair – Piper Jaffray

No, okay…

Brad Cole

I think due to the reimbursements constrains that we’re very constraining in the U.S. and yet we grew quite rapidly, the constraints were even stronger in Europe so, it’s going to be on reimbursement, it’s going to be the gaining factor and that’s going to take some time.

Kimberly Popovits

I think the flip side is once we can get reimbursement covered in Europe. We think that the trajectory will then be faster in terms of patient access than it likely what’s here, but we’ve got to get to that hurdle, over that hurdle first.

David Clair – Piper Jaffray

Okay. And then just a quick one on colon cancer if we don’t see IVDMIA come out. Do you think that there is a chance that we could see colon cancer in the U.S. by the end of ’09?

Kimberly Popovits

Well, our target and what we've talked about is getting the data presented sometime in 2009, it really will depend on that data and how strong it is and how fast that we could launch it after that. So, if IVDMIA isn’t around clearly will move forward under the appropriate pathway, which today is CLIA and would move pretty quickly to do that, but again time will tell and we will wait to see that the clinical data. Randy if you want to.

Randy Scott

It’s really likely to be in 2010, though by the time we get all of the data that rolled that out to the physician community I think you can expect probably at 2010 launch timeframe for colon.

David Clair – Piper Jaffray

Okay. And then just one more question here. You mentioned breast, prostate and renal kind of, as the pipeline. Can you give us a little bit of color as far as priorities there, I mean is renal kind of the top priority of the three or how should we look at that?

Randy Scott

Yeah, I guess at this time, it’s still early we’re getting data and we’re certainly going to let the data and the biology drive us and get us excited. Certainly there are needs in all three of those areas with regard to the role that personalized medicine is going to play in cancer care. This is just the beginning of this new era of allowing cancer treatment decisions to be based on biology and on validated tests. So, I would say we’re excited to see that new data and certainly will base our priorities going into the future on that data and on the needs of patients and physicians.

Operator

We will take our next from Peter Lawson, Thomas Weisel Partners.

Eric Criscuolo – Thomas Weisel Partners

Hi, good afternoon. This is Eric Criscuolo filling in for Peter. First I guess congratulations Kim and Brad on your new and increased roles.

Kimberly Popovits

Thank you. We’re having fun.

Eric Criscuolo – Thomas Weisel Partners

I bet. I guess just first question, I know you had said that you haven’t seen an impact yet from the economy. But maybe if I can get your thoughts on, how you think maybe going forward unemployment hits like 10%, the coverage gets lost? Is there any worry about that as far as the price being expensive $3,000 plus for the test? Any worries at all going into 2009 for that?

Kimberly Popovits

Well, I would say that. Since we’ve always manage the business under, I think Randy’s leadership was only the paranoid survive was that, Randy I think that while we’ve not seen any impact from this downturn in the economy. We would be foolish to not, watch it closely, and manage the business with the same disciplined approach I think we’ve always done. I think where you could end up with the things that we want to watch uninsured patient population, people laid-off, whether it’s insurance or higher co-pays, things of that nature. Again we’ve done some early market research in that area and have not seen anything yet. But we are going to continue to monitor that. Brad, do you want to add anything?

Brad Cole

No, that’s fine.

Eric Criscuolo – Thomas Weisel Partners

Okay, great thanks. And I guess my last question as far as the cost to setup, the Switzerland subsidiary or maybe the cost going forward. I mean is that going to be any type of color on maybe what that structure is going to be like as far as cost going forward?

Brad Cole

It’s really not the cost of setting up subsidiary, running the subsidiary. It’s really the nature of the activities that we are going to be employed in Europe, running some clinical utility studies with payers and with physicians. And so, we will be sponsoring some studies there and we will spend significantly more money in 2009. It’s all incorporated into our guidance.

Eric Criscuolo – Thomas Weisel Partners

Okay, great. Thanks a lot.

Operator

(Operator Instructions). We will go next to Raymond Myers, Emerging Growth Equities.

Raymond Myers – Emerging Growth Equities

Thanks for taking the question.

Kimberly Popovits

Welcome.

Raymond Myers – Emerging Growth Equities

My first question is, how will you deploy the 20 sales people. Is it more expanding geographies or a deeper penetration within the geographies?

Kimberly Popovits

We are really very focused on deeper penetration. So as you might recall with well over 7,000 oncologists now having experience or breast cancer surgeons with the assay. We have really reached a very broad group of the community. The issue is really being able to spend more time with each physician to get at the penetration issue. I mean, we have convinced ourselves through a number of experiment some planned and some unplanned, regarding the nature of the intensity of the sell in terms of the service component. So we think, it’s really important to get these reps targeted where they can spend more time with each practice. And again as I mentioned earlier have really great data and tools now to be able to know exactly where that 50% of the market is that we are not reaching today because some of them are out in states that, frankly we haven’t had a lot of coverage and or somebody's been trying to cover four or five states?

Raymond Myers – Emerging Growth Equities

Well that sort of speaks to new geographies to some extent. So there is it a mixture, or maybe, of both…

Kimberly Popovits

Yes, they are new geographies, when I would say maybe not totally new, some are completely new, some are just areas where we had coverage that's been too broad and reps have just not been able to get to places in their territories where we like to spend more time so little of both.

Raymond Myers – Emerging Growth Equities

Okay, that’s great. And that kind of sets up my follow-up, which is how many sales people do you think would fully saturate the market?

Kimberly Popovits

Well, I think that we feel comfortable at 80 could it go to a 100 at some point in time, we are going to watch that there could be another step-up, it will also depend on new data that we get and how we might be expanding in the breast cancer area, as well as the new products, perhaps like, with the colon cancer launch depending on that data later this year. So do we think that 80 would be the maximum number with more than one product now.

Raymond Myers – Emerging Growth Equities

Great and that's what I assume was as you had more products, there'll be synergies across the products and you can have more efficiency leveraging your sales force?

Kimberly Popovits

Absolutely, so we see a great opportunity to leverage the infrastructure, all of the infrastructure built among the sales organization to include managed care and sales operation, customer service and with the addition of new products that we are increasing the breast cancer market opportunity. I’m keeping in mind most of patients present in the community settings and oncology patients. So, where we have the breast there most of those physicians see breast cancer and colon cancer unlike sometimes in the academic centers where those groups are specialized to one or the other?

Raymond Myers – Emerging Growth Equities

Right that's great. Next touching on the issue of FDA approval and whether you will need FDA approval or not. Do you have a sense yet as to whether you will need FDA approval for your breast cancer test and I believe I read that you are expecting to file for FDA approval for colon?

Kimberly Popovits

Yes, no on both, so do we have and what we do know I guess let me start with what we do know. We do know that the appropriate pathway today for these tests remains through CLIA. And that, it has been, what we’ve been operating under, keeping in mind, we also see a need for perhaps newer enhanced regulation. How that will eventually unfold we don't know. So until there is clarity around that. We will continue to develop the products under the CLIA regulatory pathway until such time we know there's a different pathway and its clear, which pathway that is. So, again I know that didn’t answer your question. We don't have a crystal ball to see how that will end up, but do believe that through the industry groups that we’re working with and the number of conversations we’ve had around this issue that folks clearly recognized, that these tools are very different. And it’s kind of the 21st century tools being put into 19th century pathway doesn’t going to work. And so there really is a critical need to develop a new pathway that accommodates these tools, if we’re going to see really the fruit of all – that this work around personalized medicine.

Raymond Myers – Emerging Growth Equities

If you look out two or three years, if you think about how – if the regulatory structure is more codified and concrete. Is that a long-term benefit to Genomic Health because it will be more clear how to get your products to market and then also how to get reimbursed for them?

Kimberly Popovits

I think that there are two; there could be two separate issues that eventually come together. So would it be a benefit to Genomic Health to have clarity around the pathway yes, it would be benefit to everybody working in the space to do that. I also think that it could be a competitive barrier for Genomic Health in a good way. In that we believe that the level of scientific evidence for these tests should be high, it should be where we placed it with Oncotype DX and we'd like to see regulation be built around this type of pathway. So we see a great advantage and getting clarity around the issue. The reimbursement side is another area where we again think there needs to be a whole new system to deal with these new tests. For example the CPT coding system that exist today, it doesn’t work well for these new molecular diagnostics. So we will be working in tandem with these groups to both provide, perhaps the solution to the regulatory issue and at the same time start to look at the reimbursement side of things to see if we can’t develop a solution that better works for the reimbursement around these new tools, because again you are trying to use a system that was build for a much different place and time in a very different types of test.

Raymond Myers – Emerging Growth Equities

Right. And as you’ve had success in getting reimbursement for node-negative. Have you found that it’s easier now to go back to the same insurers and get reimbursement for node-positive?

Kimberly Popovits

Brad?

Brad Cole

Well, I'm not so sure that it’s easier because the criteria that that they've said is the same, they want multiple publications and usage in the physician community and so we’re seeing what we saw three years ago with node-negative breast cancer. We’re beginning to see adoption and we’re still waiting for some of the publications to be in placed to be able to go through the process with the payer. So, once we have that data it probably will be more straightforward. They understand the product well, but it's just going to take sometime.

Kimberly Popovits

I think that one thing that makes it easier is the fact that payers now see the impact that this tool is having on treatment decision and planning. So initially when we came out with the breast cancer, a product for the node-negative population, one of the concerns of payers was, would if it doesn’t change treatment decisions. And they are clearly now seeing, we've done multiple studies looking at how often the treatment decisions changed and it’s anywhere from 30% to 40% of the time payers get it and they see the impacts that it’s having. So I don’t think we will have it’s harder than issue or harder to sell getting them to the point that the tool is going to make a difference in their patient population.

Raymond Myers – Emerging Growth Equities

Well, that’s great to hear and congratulations. So you've got a very interesting business.

Kimberly Popovits

Thank you. Thanks for your support.

Brad Cole

Thank you.

Operator

We will take our next question from George Zavoico, Westport Capital Markets.

George Zavoico – Westport Capital Markets

Hi Kim, Randy everybody. Kim congratulations...

Kimberly Popovits

Thanks George.

George Zavoico – Westport Capital Markets

And Steve, Randy congratulations you too.

Randy Scott

Thanks George.

George Zavoico – Cantor Fitzgerald

A couple of questions, regarding you talked a little bit about seasonality. But typically in the fourth quarter you see a pretty nice bump up is not an increase, but in the terms of test delivered. The fourth quarter really wasn’t that significant increase. Can you just comment on that? Please.

Brad Cole

Yeah. I think the one thing that’s different this fourth quarter than last year. For example, the ASCO and NCCN guidelines were just in place and that had a lot to do with some of the growth we saw. And besides having the sales, just increase the sales force last year in the fourth quarter. We see that as having made a difference. So the biggest impact this year is that the sales force just has not had the incremental resource behind that we’ve seen in prior years. And it’s been 18 months since we put sales – increase the sales team. So we think that’s probably the primary challenge this quarter is with the coverage and we are going to see, I think a difference when we increased the sales force here in 2009, and that probably see the impact Q2 and following.

George Zavoico – Cantor Fitzgerald

So, in a sense concluding that the sales force that you had before, the 16 and then pretty much saturated the market to the best of their capability.

Brad Cole

The time they've been in the field for year and a half. We think that they’ve ramped up and improve productivity to a level where they need some more help and more coverage and that’s where we’re headed with this last investment.

Kimberly Popovits

Yeah, and I would just add to that, when I mentioned earlier, we have done some unplanned experiments and I had talked about just the level of the service component to the sell and how important that is for reps to have a lot of face time with the physicians in the practices in general. We had a situation in the fourth quarter, where we had six open territories for various reasons a couple of medical leaves, and a couple of folks that we are in transition into new responsibilities in the organization. And looking at the growth rates in those territories we clearly saw the difference of a rep not being there for a very short period of time, which just further supports the need to increase the sales force again and make sure that we have the depth of coverage.

George Zavoico – Cantor Fitzgerald

Okay, thanks. I am impressed with your efforts on doing online marketing and sales and information. Are you getting, I imagine you keeping track of the hits and is that increasing is that ramping up exponentially?

Kimberly Popovits

Yeah, we’re getting very positive and strong feedback on all fronts with the educational work that we’ve done both through the advocacy groups, the direct-to-physician work that we’re doing. And we really want to continue to focus our resources from a marketing standpoint on building these types of educational material as we’ve gotten very positive feedback from them.

George Zavoico – Cantor Fitzgerald

Okay. And you mentioned node-positive waiting for publications. The abstract obviously doesn’t carry the same weight as a New England Journal of Medicine Article. I imagine you have some of these either submitted or impressed. Can you provide any sort of guidance as to when these publications might appear in 2009 or early or late?

Steve Shak

Yeah, hi George this is Steve. Obviously, these are important publications for our collaborators. They're working at their utmost speed. Obviously, I don't have a crystal ball and don't know when they are going to be published. Obviously, we all await those publications and again we will see soon. I think one of the things though that also is occurring now as we are recognized as the leader in the field. Is that we are really continuing to attract and bringing great talent and great collaboration. So, the collaborations with SWOG and other groups now is really helping us to grow our list of great collaborators and that’s very exciting for us as well.

George Zavoico – Cantor Fitzgerald

Okay. And finally can you just comment on where you are with the DCIS and the cross test. I imagine the Lilly, Bristol-Myers, ImClone thing may have complicated development?

Randy Scott

Yeah, on both of those for DCIS, we are planning to initiate these areas of studies this year, and are very excited about them. And with regard to the collaboration with the BMS and ImClone, as you remember Joffre Baker presented a very exciting results on new genes that go beyond K-Ras that might be useful for predicting the benefit of Erbitux. And again at this point Lilly is working with ImClone in a transition now to take on the further development of Erbitux and again we look forward to moving forward with discussions about the new genes we’ve identified for Erbitux treatment.

Operator

We will take our next question from Kevin Degeeter, Oppenheimer.

Kevin Degeeter – Oppenheimer & Co.

Hey, congratulations guys, terrific quarter. A number of my questions have been answered maybe I’ve just get in a couple on colon here, colon cancer test. Just help me, I guess understand here, if one of the genes if whatever reasons we don’t have, we can make a clear call on one of the genes, maybe we don't have clear data. Is that a dropout from the 1200 sediment and just help me understand how I should think about, that’s 1200 how many you will likely dropout in conclusive et cetera and how it will be weighed.

Kimberly Popovits

Yeah, let me clarify for the 1200 it is the number of patients in the validation study the large study that we’ve just begun. The number of genes actually is the 18-genes that have already gone through four different, what we will call pre or run-in validation studies. So, we started with well more than 700 genes and work that down to the 18 that is in the final panel. So it’s the six prognostic and seven predictive. So we’re not going to see those genes dropout in the validation study. What we’re looking to do in the validation study is defined, it hit the end points and I think Steve can talk about what those are?

Steve Shak

Did that address your question?

Kevin Degeeter – Oppenheimer & Co.

Actually I was asking a slightly different question, which is for either population coverage or anomalies within the particular sample there is not a clear input with regard to one of the 18 genes, how does that get classified? And then I am interested in subsequent element as well? I am also trying to appreciate in for that 1200 patients. How actually think about the likely number of actual data points, we’ll have in terms of it from a statistical power standpoint?

Steve Shak

Okay well maybe, what I can do is sort of just go over the general design. The general design would be to define ahead of time, who would be eligible in the QUASAR study. We expect that they are going to be ultimately more than 1200 patients. And then what we do is the primary analysis to look at the performance of the both the Recurrence Score and the Treatment Score among that entire population. And it will be the overall analysis of that Treatment Score and the Recurrence Score that are built up from the individual genes. That is going to important in terms of evaluating the clinical utility of the test. In terms of whether the study is successful or not I think is what you are getting at is will be asking I guess the simplest way to put it. Is does the performance of the test in terms of identifying who needs chemotherapy and who doesn't, does that performance exceed the standard measures that are currently used, in order to decide in stage II colon cancer who should get chemotherapy. Did that address your question?

Kevin Degeeter – Oppenheimer & Co.

Fair enough. And just help me understand in practice from an enrollment perspective. The background regimen or the chemotherapy regimen in 5FU/leucovorin, I mean either, is there any stratification for patients receiving either different formulations of 5FU or I guess with leucovorin now. We have the non-racemic out there and the racemic, I mean is that something you feel, you can’t control for these all historical samples for which we can, I just want to understand the variability [out there]?

Steve Shak

Well, that’s a good question. We use in this study a standard regimen of 5FU/leucovorin. But in talking to colon cancer experts most of them, who have told us and again look at the various alternatives to 5FU such as the oral forum has being very similar and interchangeable.

Kevin Degeeter – Oppenheimer & Co.

Okay, that’s extremely helpful. And just lastly here, and I apologize to somebody else asked this question, but on the international side I mean, an exciting opportunity you are making some investments here. I mean how should we just think about revenue contribution be able to – what are some of the metrics that ultimately you'll be using to help, understand the kind of the return on investment and type of the timeframe for the return on investment?

Brad Cole

I think it’s going to take the couple of years to really see return on the investment in the range that we would like. I mean, our expectations for 2009 are pretty minimal because we have to navigate the reimbursement landscape and once that looks clear I think there is tremendous upside in the international markets, as represented by multiple times the opportunity in the U.S. but it’s going to take some time to sort through that on the reimbursement side.

Kevin Degeeter – Oppenheimer & Co.

Okay and then maybe lastly as a follow-up on that point, I mean it is since still too early with regard to international reimbursement to have visibilities to when you may help or realistically expect to have some of these first countries coming online or from a reimbursement perspective?

Brad Cole

Yes, it really is too early. We just in this month have got Genomic Health employees, as on the street as it were, a few people. They we’re working more closely with our collaborators and advisors. So, we think it’s going to be over the course of the next couple of years before we get clarity on that.

Kevin Degeeter – Oppenheimer & Co.

Great, thank you.

Operator

At this time we will conclude the Q&A portion of this call. Ms. Popovits do you have any closing remarks?

Kimberly Popovits

Yeah, I would like to thank everybody for participating, for your support and interest in our business and we will look forward to talking to you at the end of next quarter. Thanks.

Operator

And this concludes today’s fourth quarter and year-end 2008 conference call for Genomic Health. You may now disconnect.

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