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Genomic Health (NASDAQ:GHDX)

Q1 2013 Earnings Call

May 02, 2013 4:30 pm ET

Executives

Emily Faucette

Kimberly J. Popovits - Chairman, Chief Executive Officer, President and Member of Non-Management Stock Option Committee

Dean L. Schorno - Chief Financial Officer and Principal Accounting Officer

G. Bradley Cole - Chief Operating Officer and Member of Non-Management Stock Option Committee

Steven Shak - Chief Medical Officer and Executive Vice President of Research & Development

Analysts

Joel Kaufman - Goldman Sachs Group Inc., Research Division

Dane Leone - Macquarie Research

Vamil Divan - Crédit Suisse AG, Research Division

Daniel L. Leonard - Leerink Swann LLC, Research Division

David C. Clair - Piper Jaffray Companies, Research Division

Rafael Tejada - BofA Merrill Lynch, Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

George B. Zavoico - MLV & Co LLC, Research Division

Operator

Good afternoon. My name is Chuck, and I'll be your conference operator today. At this time, I would like to welcome everyone to Genomic Health First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Emily Faucette, Vice President of Corporate Communications and Investor Relations. You may begin your conference.

Emily Faucette

Thank you. Good afternoon, everyone, and welcome to Genomic Health conference call to review our first quarter 2013 financial results. Before we begin, I'd 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; our plans and prospects; our ability to leverage our existing infrastructure; the success of our business strategy; economic benefits and value to payors of our tests; growth opportunities including international; our planned launch of a test for prostate cancer patients; future products, product enhancements and our product pipeline; demand for our tests and drivers of demand; payor coverage and progress in reimbursement and patient access; our investment in our product pipeline, international expansion and commercial organization; clinical outcomes and timing of clinical studies and product launches; and our expectations regarding our ability to comply with potential FDA regulations constitute forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act.

We refer you to our annual report on Form 10-K for the year ended December 31, 2012, 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.

Joining me on the call today are Kim Popovits, our Chairman of the Board, Chief Executive Officer and President; Brad Cole, our Chief Operating Officer; Dean Schorno, our Chief Financial Officer; Steve Shak, our Chief Medical Officer and Executive Vice President of Research and Development; and Kathy Hibbs, Senior Vice President and General Counsel.

I'll now turn the call over to Kim.

Kimberly J. Popovits

Thanks, Emily, good afternoon, everyone, and welcome. In the first quarter, we delivered strong year-over-year increases in both product revenue and tests delivered. These results reflect our continued success in expanding the U.S. invasive breast cancer market and achieving significant growth in our international business.

Additionally, we are pleased to report 2 important milestones that we believe will lead to long-term growth beyond our existing core markets: first, the Oncotype DX DCIS breast cancer validation study published online this afternoon in the Journal of the National Cancer Institute, supporting our ongoing efforts to expand reimbursement and patient access to the DCIS Score.

And as you know, next week, at the AUA meeting in San Diego, our collaborators from UCSF will present the full positive results from their landmark prostate cancer clinical validation study in an oral session on Wednesday, May 8. Today, we are excited to announce that we will make the Oncotype DX prostate cancer test available to patients and physicians immediately following the presentation, and we'll be holding an investor webinar with our UCSF and Cleveland Clinic collaborators at AUA to provide additional detail on the rigorous development, validation and expected impact of the prostate cancer test on clinical practice. We look forward to answering your questions regarding these exciting results next Wednesday.

I'll now turn the call over to Dean, Brad and Steve to provide further details on our first quarter financial results, our worldwide commercial and operations progress and our recent clinical update. I will then conclude with our business priorities for 2013. Dean?

Dean L. Schorno

Thank you, Kim. During the first quarter, we delivered total revenue of $63.1 million compared with $58.5 million in the first quarter of 2012. Product revenue was $62.7 million compared with $57.9 million for the first quarter of 2012, an increase of 8%.

As you may remember, in the first quarter of last year, we had stronger-than-expected revenue performance due to the inclusion of approximately $1.2 million of cash revenues from payments by Medicare for colon test performed prior to the establishment of coverage. Without this incremental revenue in the first quarter of 2012, year-over-year product revenue growth would have been 11%. We anticipate product revenue for the second quarter to be similar to that of the first quarter due to historic seasonal patterns along with the anticipated impact of sequestration, which is expected to be approximately $1 million for the remainder of the year. Contract revenue comprised the balance of total revenue for both periods.

During the first quarter, we completed the majority of our collaboration work with Pfizer. The remaining work is expected to be completed in the fourth quarter of 2013 and would result in a milestone payment of $1.5 million that we expect to recognize as revenue in the fourth quarter. While we may have other collaboration revenue during the remainder of the year, we do not expect this revenue to be significant.

During the quarter, net loss was $900,000 compared with net income of $800,000 in the first quarter of 2012. We delivered 20,350 Oncotype DX tests in the first quarter, an increase of 9% compared with more than 18,630 tests delivered in the same period in 2012. Year-over-year tests delivered growth would have been 11% without the impact of the additional leap year day in 2012. Of note, substantially all of the test growth during the quarter resulted from a combination of invasive breast cancer and international testing volumes, reflecting our current priority areas of focus.

On a sequential basis, our U.S. invasive breast cancer business grew 9%, resulting in record-high market penetration. 67% of tests delivered and 73% of product revenue were recorded on a accrual basis in the first quarter of 2013. Our gross margin for the quarter was 84%. Cash and cash equivalents and short-term investments at March 31, 2013, were $96.1 million compared with $99.1 million at December 31, 2012.

Total operating expenses for the first quarter of 2013 were $64 million compared with $57.6 million for the same period in 2012. This increase reflects a typical pattern we see in the first quarter each year, as well as our preparations for prostate launch and investments in our international business.

As a reminder, during our call, our last call, we anticipated net losses during the first 2 quarters of 2013. We continue to expect operating expense to increase in the second quarter as we continue to prepare for and execute the launch of our prostate cancer test and further invest in our international expansion and product pipeline. As such, we currently expect a net loss of approximately $3 million in the second quarter as we seek to realize these opportunities.

I'll now turn the call over to Brad to review our global, commercial and operations progress.

G. Bradley Cole

Thanks, Dean. During the quarter, we continue to make important clinical and commercial progress with publication of our colon CALGB data, numerous medical meeting presentations and incremental success in securing reimbursement worldwide. Today, we announced that the Journal of the National Cancer Institute published the positive results from our clinical study of the Oncotype DX DCIS Score. These findings, originally presented at the San Antonio Breast Cancer Symposium in 2011, demonstrated the utility of Oncotype DX to guide radiation treatment decisions with patient -- in-patients with DCIS, an increasingly detected subgroup of breast cancer affecting up to 50,000 women each year in the United States alone.

Together with the recently presented positive cost-effectiveness data in DCIS, we believe these peer-reviewed, published results paved the way for expanded reimbursement and increased patient access to the Oncotype DX DCIS Score. With publications just now occurring, we anticipate further reimbursement traction to take place in the second half of 2013.

In the meantime, we recently established DCIS and node-positive breast cancer coverage for an additional 1.5 million lives in the United States through contracts with Blue Cross Blue Shield Excellus of New York and Blue Cross Blue Shield of Wyoming. And in colon cancer, we established a policy with Highmark for Stage II colon cancer, covering 5 million lives in the United States. We expect to increase test volume and expand reimbursement in the second half of 2013 for our Oncotype DX colon test and DCIS Score, supported by the CALGB and JNCI publications. Today, these 2 products represent approximately 5% of our test volume.

Turning now to our core U.S. invasive breast cancer business. The solid growth delivered in the first quarter demonstrates our success in reaching the women who today are not getting Oncotype DX. And our clear differentiation of Oncotype DX is the only genomic test validated and recommended in guidelines for the prediction of chemotherapy benefit. These ongoing efforts include activating patients to ask for the tests, targeting underpenetrated regions and addressing inconsistent practice patterns.

In March, at the Society of Surgical Oncology annual cancer symposium, we presented positive results from a large study that demonstrated the Oncotype DX recurrence score result is a robust predictor of loco-regional recurrence in node-positive breast cancer patients. These results demonstrate value in tailoring radiation therapy treatment for certain node-positive patients treated with hormone therapy and chemotherapy, thereby providing additional clinical utility for Oncotype DX in the these patients.

Internationally, several significant organizations have recognized the utility of the Oncotype DX breast cancer test. In the United Kingdom, the National Institute for Health and Clinical Excellence, or NICE, issued a revised draft diagnostics consultation document on genomic tests, provisionally recommending Oncotype DX as the only multi-gene breast cancer test for use in clinical practice for certain patients to guide chemotherapy decisions. NICE's position clearly differentiates Oncotype DX from other genomic tests. We are pleased that the review committee recognized the superior evidence both with regards to number and quality of studies and the consistency of results, demonstrating the extent of clinical validation of the Oncotype DX test. This differentiation is consistent with leading international breast cancer treatment guidelines including ASCO, NCCN, ESMO and St. Gallen.

Additionally, AGO, a leading expert panel in Germany, updated its evidence-based guidelines to include the Oncotype DX breast cancer test to predict the risk of recurrence and likelihood of chemotherapy benefit.

In March, we presented data from 22 international studies demonstrating worldwide adoption and the value of our breast cancer test at the St. Gallen International Breast Cancer Conference. This unparalleled number of studies and consistency of results continues to demonstrate the ability of Oncotype DX to change treatment -- excuse me, breast cancer treatment decisions and provide economic benefit across multiple healthcare systems throughout the world.

Along those lines, during the quarter, we secured additional contracts in Germany and France for the Oncotype DX breast cancer test, bringing the total number of international covered lives to more than 100 million. We also added a new distribution partner in Southeast Asia for our breast and colon cancer tests and expanded an existing distribution agreement in Hong Kong to include colon cancer.

As a result of our continued focus on a worldwide expansion, our international test volume increased by approximately 44% compared to the same period last year. International product revenue grew by more than 69% to $8.5 million compared to the same period last year and represented 14% of product revenue in the quarter.

Looking ahead, we continue to expect international revenues to be a significant contributor to overall product revenue growth.

I will now turn the call over to Steve to discuss the DCIS publication and our pipeline efforts.

Steven Shak

Thanks, Brad. The Journal of the National Cancer Institute publication of the Eastern Cooperative Oncology Group study of Oncotype DX in patients with ductal carcinoma in situ, or DCIS, marks a significant milestone for Genomic Health, and more importantly, the women who are faced with the DCIS diagnosis and treatment decision.

The detection of this pre-invasive form of breast cancer is increasing in the United States with more than 50,000 patients diagnosed each year. Most women with DCIS who receive breast conserving surgery without radiation will not develop cancer in the same breast, either DCIS or invasive cancer. However, traditional clinical and pathologic criteria are insufficient to define a low enough risk population for whom treatment with surgical excision alone without radiation may be appropriate. In the absence of precise risk information, patients are overtreated with radiation and experience significant short and long-term side effects and health care costs.

Our study with ECOG, which had eligibility criteria to include the majority of DCIS patients, established that the Oncotype DX DCIS Score goes beyond traditional clinical and pathologic measures to predict the 10-year risk of a local recurrence of DCIS or the development of invasive breast cancer, risk confirmation that is critical in guiding the decision to use radiation in women treated by local excision. Specifically, the study demonstrated that 70% of patients who met the ECOG eligibility criteria had a low DCIS Score and that such patients may be able to avoid radiation. Later this year, we plan to initiate a second study to extend these findings by studying an uneven broader DCIS population that will include more patients with larger tumors and ER-negative disease. We expect results from this study early next year.

Also during the quarter, we presented results from 2 next-generation sequencing studies at the 14th Annual Advances in Genome Biology and Technology Meeting. The results demonstrated that DNA strand-of-origin information can increase confidence in the identification of prognostic biomarkers and that tumor-specific gene mutations can be effectively examined using archival fixed paraffin embedded tumor tissue, enabling an improved and more practical process of tumor analysis. We believe these findings will accelerate the development of future tests based on our ongoing research that combined both whole transcriptome profiling and mutation analysis.

Through the rest of this year, we plan to report on the progress in using next-generation sequencing and other technological innovations to drive biomarker discovery and development of new products for cancer patients. In the meantime, we look forward to presenting 10 studies at the American Society of Clinical Oncology Annual Meeting in June, highlighting progress with our Oncotype DX test in breast, colon and prostate cancer.

I'll now turn the call back to Kim.

Kimberly J. Popovits

Thanks, Steve. Looking ahead, we are on track to further diversify our business with the launch of our third product franchise and the continued expansion of our global commercial impact while advancing our discovery and development pipeline.

On the clinical side, we have several key goals for the year, including initiating an additional large DCIS clinical studies to confirm and extend the findings of the landmark E5194 study, conducting a colon oxaliplatin treatment validation study for prediction and beginning a large clinical study using next-generation sequencing to examine not only tumor expression but also mutations in fixed paraffin embedded tissue.

And on the commercial front, we will remain focused on expanding our invasive breast cancer penetration by addressing the 2 in 5 eligible women in the U.S. who are not receiving today's standard of care, which recommends the Oncotype DX recurrence score for treatment planning, securing reimbursement for the Oncotype DX DCIS Score, increasing adoption of reimbursement in international markets, and importantly, launching the Oncotype DX prostate cancer test following the AUA presentation on May 8.

Along with our UCSF and Cleveland Clinic collaborators, we look forward to providing you with access to the full prostate cancer validation study results during our webcast next Wednesday, at which time, we will also discuss our launch plan.

I would now like to open the lines for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Isaac Ro with Goldman Sachs.

Joel Kaufman - Goldman Sachs Group Inc., Research Division

This is Joel in for Isaac. I've got a quick question on R&D for the rest of the year. I think you just named a few R&D projects and clinical trials that you guys are undergoing. How should we be thinking about that line item as we progress through 2013?

Dean L. Schorno

Yes, so the R&D spend has historically been in the 21%, 22% range of total revenues. And we expect to be -- continue throughout the year in that range. I would note that there is some variability in some of the R&D programs we do. So we'll bounce around a little bit but remain in that range.

Joel Kaufman - Goldman Sachs Group Inc., Research Division

And then just on the reimbursement side, have you guys been on any extended conversations with any local Medicare carriers as we switch from code stacking over to the new codes?

Kimberly J. Popovits

Well, probably just a little bit of history there. We actually don't code stack with Oncotype DX. So we've not been involved in that discussions. Back in 2004, when we launched the test, we chose the path of going with the miscellaneous code. And the discussions that are underway today, I think with many tests that are code stacking, we had those discussions a long time ago. So we've never code stacked, and we're not involved in that process right now.

Operator

Our next question comes from Dane Leone with Macquarie.

Dane Leone - Macquarie Research

It seems like momentum in the business really picked up. So the first question for me is we saw a nice step function sales and marketing expense. Maybe it would be helpful for us going through the model for the year if you could just kind of break down in the context of the launch of prostate and DCIS ramping for the rest of the year. How do you think that spending plays out and especially maybe in the fourth quarter when you usually have the San Antonio Breast Cancer Conference?

G. Bradley Cole

Yes, this is Brad. Thanks for the question, Dane. You did see an increase in sales and marketing in the first quarter but not unlike the kind of step function we see at the beginning of the year across all of our functions. So early in the year, there's a physician education and programs following San Antonio Breast Cancer in late 2012, so those costs drive first quarter costs as well. And as we go throughout the rest of the year, you'll see actually more cost in sales and marketing associated with prostate with the beginning of prostate spend starting in Q1 but there will be increased spend in Q2. By the time we get to the fourth quarter, I think things will even out. There's a significant investment in Q1 and Q2, but I think there will be some increased investment across the board because the international emphasis that we've been speaking about for some time will continue to go on. I think there's an opportunity to increase our footprint in Europe as well over the course of the year.

Dane Leone - Macquarie Research

Okay, great. And a follow-up question. It's related to the average nonaccrual test price. If the math I'm doing is correct, it seems like that took a step function down this quarter versus last quarter. And I was just curious if there is any color you could provide on the mix there and how that's affecting the average test price?

Dean L. Schorno

Yes, so I think the mix, Dane, is the accrued test volume did increase to 67% in the quarter. So that's good news reflecting the strength in invasive breast cancer in the U.S. we talked about, just generally, the strength in our ability in reimbursement and our collection success. With that said, from a cash perspective, the rest of the test volume then is cash basis. So we'll see that move around as a function of both accrued test fund but also just as a function of cash -- I mean, in the variability of cash coming in. We did see in Q3 and Q4 and commented on some of the international cash strength we saw. So I think we're seeing some normal variation in the reduction in that cash ASP.

Dane Leone - Macquarie Research

Okay, that's great and very helpful. A quick question. Any update to the volume guidance this year? I didn't hear it mentioned.

G. Bradley Cole

No, we haven't updated our guidance, so the annual guidance that we provided back in February is still our guidance for the year.

Operator

Our next question comes from Vamil Divan with Crédit Suisse.

Vamil Divan - Crédit Suisse AG, Research Division

So mine is actually related to the guidance, also with DCIS. I mean, congrats on the publication. I think it's fair to say they come a little later than you guys thought. Are your expectations for DCIS still similar to what it was at the beginning of the year? And if not, what's making up the difference? Is the full year guidance the same for test volumes?

G. Bradley Cole

Yes. So you're right that DCIS came a little later than we would have expected or hoped for, but we're just -- we're delighted that it's here today. And it provides us the opportunity to go forward with a variety of payors and continue the conversation about reimbursement. We've had some success in reimbursements with private payors, as we announced on the call. But as we look forward, we think DCIS volume will pick up with publication. Physicians now have the data in hand -- will have the data in hand. Sales reps will be able to have discussion with them about it. So we think we will see increasing contribution from the test volume from DCIS. It did happen a little bit later, but within the envelope of our guidance, we still think our guidance is at the right level.

Kimberly J. Popovits

And I will just add, it's especially important to our managed care team who, as you can imagine, has been having ongoing conversations with the payors who are waiting for this publication so that we can go back in and have final discussions in that regard.

Vamil Divan - Crédit Suisse AG, Research Division

Okay, all right. And then the same question, just more generally, previous quarters, you were talking about just kind of overall utilization trends and physicians visits. I didn't catch anything on the call. I'm just curious on what you saw there, just overall in terms of physician visits for the quarter relative to the last couple of quarters.

G. Bradley Cole

Q1 was characteristically strong, like we've seen in past years, and we're pleased to see the traction was as good as we would have expected. I don't have any color, really, on physician visits other than test volume was up 9% sequentially and we're at the highest level of penetration in the invasive market as we have been. And the international growth continues to be very strong and very pleasing.

Operator

Our next question comes from Dan Leonard with Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

I was hoping you could talk a little bit further about your expectations internationally. You grew revenue there 69% in the first quarter, and presumably the NICE recommendation, the German endorsement are tailwind still to come for the year. So how are you thinking about that performance versus maybe the 45-ish percent you did last year?

G. Bradley Cole

Yes. There's a couple of things that happened last year that have provided continued strength in the international business, broadened reimbursement in Canada, successful reimbursement in Ireland in the private pay market, in public pay markets, continued growth in the British private pay market. It happened kind of Q2 and Q3 and Q4 and being referred to some of that strength in cash collections in the back half of the year. That's in place now and contributing to the year-over-year growth that we reported here in Q1. As we catch up with those events on a year-over-year basis, our top line growth in international will moderate but still be strong. One thing I'll point out, that test growth was up 44%, which isn't tied to, let's say, reimbursement pull-through. So as test growth continues and these high numbers will still see strong growth from international, but it will moderate up to 70% because of this comparator.

Daniel L. Leonard - Leerink Swann LLC, Research Division

And then for my follow-up question, the intellectual property environment and the diagnostics industry is of high interest in investors right now. And I know you're not a direct party in the Myriad case, but you certainly filed for patents since Prometheus, you have some -- you have plenty of experience in the Patent Office. So could you give us an update on how you're thinking about the IP environment and diagnostics in light of both the ongoing case, as well as the case that concluded last year?

Kimberly J. Popovits

Sure, we'd be happy to. Yes, I think it's really important to understand the nature of the types of claims and patents that we have issued and that we still pursue. Our claims focus on methods, specifically the methods for generating a recurrence score. And as you saw in the Prometheus opinion, that's actually the type of claim that the court indicated would still be eligible for patent. And that's certainly in contrast to the case that the Supreme Court heard with regard to the composition claims for human gene patent, which is again, not the focus of our patent's state. So we continue to file and continue to get patents issued in this environment.

Operator

Our next question comes from Bill Quirk with Piper Jaffray.

David C. Clair - Piper Jaffray Companies, Research Division

It's Dave Clair in for Bill. Say, I just want to touch on the international market again here. So how big is an opportunity is the U.K. for Genomic Health and have you seen any kind of momentum over there following the NICE recommendation?

G. Bradley Cole

The opportunity in the U.K. is sizable. There's about 60 million lives there. If you think of that relative to the U.S., so maybe 20% of the U.S. opportunity. For a variety of reasons, it could be plus or minus, 20% of the U.S. opportunity. We do have full private pay. So we're seeing nice growth there, but it's like -- it's in the smallest part of the market. The NICE position that they've taken is a draft guideline. So we don't have those finalized yet, and it's probably later December that they will get finalized. And following that, it will require us to contract and drive adoption with the guidelines in place. And so that -- it's premature to see what the effect of those will be, but we're excited about what they'll mean. And being the only test recommended in the U.K. for usage, it's a great opportunity for us.

David C. Clair - Piper Jaffray Companies, Research Division

Okay. And then with the prostate test launching next week, can you maybe walk us through what kind of preparations need to happen before the launch and what we should expect kind of in the first couple of months of the launch?

Kimberly J. Popovits

Well, as you can imagine, we've been quite busy for some time now. We've got a great sales team in place. They've been fully trained. An outstanding senior sales executive and a marketing team that's in full action. We're really pleased with the marketing campaign that you'll all see next week. We'll roll that out at AUA. It's, I think, very innovative and really hits at a very important message and issue in prostate cancer. So that is all set. Sales team is ready to go. And so they'll be out there just after the meeting. And I would just remark that similar to how we launched in breast and colon, we recognize that we need to address these issues with the key opinion leader and do a significant amount of education there. We also have a medical science liaison team that's going to be focused on prostate with us in doing that. And as we start to see that traction, we'll clearly begin to increase the sales force, just as we did with breast and colon. But we think we need to do that in a measured way as we lead towards reimbursement and the other validation studies that we're doing.

Operator

Our next question comes from Derik De Bruin with Bank of America Merrill Lynch.

Rafael Tejada - BofA Merrill Lynch, Research Division

It's Rafael in for Derik. Just when looking at the total number of test results that were delivered this quarter in comparison to [indiscernible], well, they were above our estimates. So I'm just trying to get -- I know some variables were noted during the call, but I'm just trying to figure out which one, I guess, had the bigger impact in terms of volume growth. Is that more of an issue with having better penetration in the U.S.? Or is it more of an impact overseas? And to what extent is it -- is it any potential switch back from docs that may have been using a competitive product in the marketplace?

Kimberly J. Popovits

Well clearly, as Brad mentioned earlier, we are seeing our highest penetration ever. The business is growing 9%, and our core business is growing very nicely. So we can certainly see it in our focus on the message of differentiating Oncotype DX. Clearly, the only test that's been validated and endorsed by multiple guideline committees for chemotherapy benefit is a message that resonates. The clinical evidence speaks for itself. We had new evidence that we shared with you in last quarter's call. That has had an impact in the field too, just highlighting this very important point. So overall, the growth came from our core business, and certainly, international growth as well.

G. Bradley Cole

I think it might be important to point out that the test line of both 20,000 met our expectations. That may have been higher than The Street overall. But it certainly met our expectation. We expected it to be the place we're at.

Rafael Tejada - BofA Merrill Lynch, Research Division

Okay. And then just so now at DCIS, just having this publication, and hopefully, as you mentioned, that might lead to further reimbursement traction in the back half of the year. Could you help us, I guess, get a better sense of what that means in terms of volumes? Maybe a way to do that is to think about the number of payors out there that had initially didn't cover the test and were waiting for publication like this to come online?

G. Bradley Cole

I think most payors are in that mode where they're waiting for publication. We have 10 million, 15 million lives covered for DCIS, a small number, without publication through a variety of means. I think it will help us in a number of ways. One, if we don't have a coverage policy when we appeal the test, the rejection, the published data is helpful and the conversation with the medical director, and historically, that resulted in better traction, even in advance of a policy. It will help us have multiple conversations with the managed care team with medical directors. And I think in the case of public pay, it will help us have the same kind of conversation with Medicare. But it's hard to tell what the timing might be. I'll remind you that colon and DCIS are less than 5% of test volume, so although we expect traction in both volume and reimbursement, it will be meaningful to the business if it won't be material. DCIS is a big opportunity. 50,000 women diagnosed each year. I think the opportunity there is half again as big as the invasive breast cancer. So in the years to come, it's going to be a very important segment for us.

Rafael Tejada - BofA Merrill Lynch, Research Division

Just one clarification now. Just on what was said regarding product revenue sequentially for the Q2, I think you were just saying that it should be more or less flattish. I just wanted to confirm that.

Dean L. Schorno

That's correct. So we've seen historic seasonality in Q2. And there's a bit of sequestration impact also, $1 million for the rest of the year.

G. Bradley Cole

And we don't think this great news from DCIS publication today will translate itself into meaningful revenue in the next 45 days is another way to think about Q2.

Operator

Our next question comes from Doug Schenkel with Cowen and Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

My first question is on competitive dynamics. I believe U.S. volumes grew at least at low single-digit levels year-over-year and we're, yes, I think, about flat sequentially, just correct me if I'm wrong. And importantly, it sounds like a lot of growth was via invasive, which is encouraging. So the question here is one privately held competitor is pretty open about talking about share gains at your expense. There's at least 2 others that are planning to launch products over the next year or so. Do you think you're losing share? Because if so, it wasn't apparent this quarter. And moving and looking ahead, are you doing anything differently to prepare for potentially intensifying competitive landscape?

G. Bradley Cole

Let me just jump in here and clarify a fact, and then maybe Kim can address the other point. We saw test volume growth in our invasive breast cancer business in the U.S. grow at 9% sequentially. And it's up year-over-year. So we don't have flat volumes in the U.S. Obviously, there's strong international growth, but there's still growth in the U.S. invasive breast cancer market. In the areas where we don't have yet publications in Q1 but we do in Q2, in colon and DCIS, we're relative flat. But our invasive breast cancer business was up quite strong, I think above The Street and our expectations.

Kimberly J. Popovits

Yes. I would just echo that the growth in the quarter, I think, clearly speaks to we're growing, not eroding. And one of the things that I just always will take you back to is the clinical data and the clinical evidence. So as you look to even third parties that are looking at all of these tests that are available, when you look at what they are designed to do, there is only one that addresses the key clinical question, which is who needs to get chemotherapy? Which patients will benefit? So we aren't seeing the situation yet. We're under review. The answer to that question hasn't been Oncotype DX yet. So our focus isn't really going to change. I mean, we will be out there talking about the clinical data. Clearly, we have great relationships with the key opinion leaders across breast cancer, and we'll continue to use the approach that we have today. It's working.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay, that's really helpful. And sorry about the bad math, and I appreciate the clarification there. Second question is, OUS revenue and volumes picked up pretty consistently over the course of 2012 as you expanded covered lives and added at least a couple of distributors, I believe. Would you expect OUS to trend the same way this year? Is that what's factored into guidance?

G. Bradley Cole

We continue to expect strong growth outside the United States, and it's included in our guidance. The reported numbers this quarter of 70% growth year-over-year will probably moderate in the back half of the year. We still expect significant growth internationally. It's 14% of revenue today. It was 12% of revenue in 2012, and we expect it to continue to grow and be -- as soon as we contribute to overall corporate growth.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And if I could ask a third one. In doing a handful of checks with urologists over the past several weeks, 2 things have jumped out at me. One is the awareness of new diagnostic tests in this area isn't all that high. And secondly, urologists, if anything, seemed to be increasingly concerned that surgical volumes in prostate are declining because there's just been such negative press out there about screening mechanisms such as PSA. On the first point, awareness or lack thereof, that makes a lot of sense given that the other data isn't going to be out there until next week. But for those of us who aren't following Genomic Health when you launched Oncotype for breast for the first time, could you just draw some parallels there? And then on the second point about concerns about surgical volumes, is any of this focus on pressures on surgical volumes that are building, factoring into your thinking about how you want to roll out this product?

Kimberly J. Popovits

Steve, you want to address surgical volumes, and I'll address how we're planning to get at the first issue?

Steven Shak

Great. Actually, the controversial for PSA is in part due to the fact that when cancers are diagnosed, there isn't a test available to know which ones are aggressive, and therefore, which ones need intermediate intervention and which ones could be treated with active surveillance. So we believe and we know many other urologists believe that the introduction of the Oncotype DX Prostate Cancer Score will indeed help PSA do the job that right now in some people's minds it's not yet doing. And we'll be talking more about the value of Oncotype DX and the prostate cancer test after the results are presented on May 8.

Kimberly J. Popovits

Yes. And to your earlier question, if I were to draw a parallel with breast cancer, what I would say is you're right. There's a couple of things. The good news is we don't have to convince people that we're overtreating prostate cancer, and we didn't have to convince people that we were overtreating breast cancer. But as you acknowledged, these tools are new in the urology community. So there's a lot of education that we'll need to do in rolling out the Genomic Prostate Score. It will include the clinical evidence. But the design of the tool is really to give them confidence to direct patients to active surveillance that should be in active surveillance. And we've heard many positive comments from a number of advisory boards that we've done in terms of the desire to have a tool like this. So we would be doing a lot of educating to roll the data out and also just how to use the test and work with Genomic Health in that regard because it is a new audience for us.

Operator

[Operator Instructions] Our next question comes from George Zavoico with MLV & Co.

George B. Zavoico - MLV & Co LLC, Research Division

Steve, I have a couple of questions for you. The DCIS Study II that you talked about, it sounds like it's a pretty fast read-out. You said early 2014. And you mentioned that part of the reason you're doing this is to broaden the DCIS population, perhaps above the 50,000 that you estimate. Can you describe the study in a little bit more detail, how you're broadening, exactly what the criteria might be for the patients going into this trial?

Steven Shak

Yes. So just to clarify a point here, the 50,000 is the addressable population that indeed would be very broad. The concept of an even broader population, again, the ECOG study had eligibility criteria that specifically were if the tumors were intermediate or low grade, they could be as large as 2.5 centimeters. If the tumors were high grade, they had to be 1 centimeter or less. That obviously is already a very broad group of patients, that constitute the majority of patients. But in the study that I referred to that we'll hear about next year, it will include even more patients who have larger tumors and even more patients that are ER-negative. And so it's in that context that it will provide additional evidence with regard to the applicability of this test to the full addressable population of 50,000 patients.

George B. Zavoico - MLV & Co LLC, Research Division

Will it be restricted to those larger tumors...

Steven Shak

No, it's not going to be restricted.

George B. Zavoico - MLV & Co LLC, Research Division

So it's just going to be just broader entire population?

Steven Shak

Correct. But again, I wanted to emphasize, the ECOG study was very broad as it is. It shouldn't be taken to indicate that we didn't have a broad population of patients in this study. As you know, most DCIS patients are diagnosed by routine mammograms, and they're detected very often when there's small -- and there's this critical question again, and I think one of the things that was very nice in the editorial, it is very nice to see the independent editorials that accompanied the publication today, highlights how this assay is a step forward. So that's really big news also today.

George B. Zavoico - MLV & Co LLC, Research Division

My second question is regarding something you touched upon just very briefly, and that is the move into the next-gen sequencing study. You said you're starting 2 of them. You're focusing, obviously, on the paraffin embedded tissues, the fixed paraffin-embedded tissues. Is the prostate -- first question is quick. Is the prostate cancer ODX test really will be the last traditional type of ODX test that you commercialize, number one? And number two, if you can, tell me a little bit more about these 2 studies.

Dean L. Schorno

Well, with regards to your second question in terms of the 2 studies, the ones that we're looking at now are focused in terms of the new ones. Number one, I'm doing in large studies, whole transcriptome analysis. So instead of -- as you know, George, in the early days, with RT-PCR, we look at the smaller number of candidate genes in terms of discovery. We now have the ability to look at the whole transcriptome in terms of expression. And I think even more exciting than that is the ability to integrate or combine looking at each patient analysis together with expression, which I know we and many other people believe is going to be increasingly powerful. Your first question was, what does the future of our clinical labs going to look like? And absolutely, we certainly see into the future that as new technologies settle down, that we'll be able to harness them and use them in our clinical laboratory for patients' decision-making in the future as well.

Kimberly J. Popovits

And I will just add maybe along the way that there are other enhancements that we are planning to make with our current products that will still be in the lab that we have today. But you're right, things will evolve and change, and we'll move the technologies into the commercial lab that give the results that we need for patients.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Kim Popovits for closing remarks.

Kimberly J. Popovits

Well, thank you for joining us today and for your interest in Genomic Health. We look forward to seeing you next week, I hope many of you at AUA, and keep an eye open for the prostate cancer data announcement. And join the webcast on Wednesday if you can. Thanks.

Operator

And this concludes today's first quarter 2013 conference call for Genomic Health. You may now disconnect.

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