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Genomic Health, Inc. (NASDAQ:GHDX)

Q2 2009 Earnings Call Transcript

August 4, 2009 4:30 pm ET

Executives

Dean Schorno - VP, Finance

Kim Popovits - President and CEO

Brad Cole - COO and CFO

Steve Shak - Chief Medical Officer

Analysts

David Clair - Piper Jaffray

Peter Lawson - Thomas Weisel Partners

Charles Duncan - JMP Securities

Scott Gleason - Stephens Inc.

Ashim Anand - Natixis Bleichroeder

Abigail Davis [ph] - JPMorgan

Matthew Scalo - Canaccord Adams

Kelley Roche - Leerink Swann

Operator

Good afternoon. My name is Kairy and I will be your conference operator today. At this time, I would like to welcome everyone to the Genomic Health second quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

I would now like to turn the conference over to 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 second quarter 2009 financial results conference call.

Before we begin, I would like to remind you that various remarks we make on this call that are not historical, including those about our future financial 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 and market opportunities, future products, product enhancements and our product pipeline, demand for our test and drivers of demand, payer coverage and pricing, progress in patient access, our investment in our product pipeline and commercial organization, clinical outcomes and timing of clinical studies, our plans for international expansion, the impact of the economy in 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 annual report on Form 10-Q for the quarter ended March 31, 2009 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.

Kim Popovits

Thanks, Dan. Good afternoon everyone, and welcome. Also with us today are Randy Scott, our Executive Chairman; Brad Cole, our Chief Operating Officer and Financial Officer; Steve Shak, our Chief Medical Officer; and Joffre Baker, our Chief Scientific Officer.

I will begin the call today with specific highlights and accomplishments. Brad will review our second quarter 2009 financial results and commercial progress and I will close the comments on our pipeline, highlighting how we are well positioned for future growth and furthering our mission of enhancing the quality of treatment decisions for patients with cancer.

In the second quarter, we delivered solid revenue growth both year-over-year and quarter over quarter, as well as narrowed our net loss and increased our total cash. Our Oncotype DX breast cancer test has now guided treatment decision for more than 100,000 patients worldwide, since it became available in 2004.

This milestone represents evidence that personalized treatment decisions are becoming standard practice for early-stage breast cancer patients and further supports the successful execution of our business model focused on delivering high value genomic diagnostics to clinical practice.

In the second quarter, we achieved two additional milestones for increasing product patient access to Oncotype DX. We secured a contracted rate of reimbursement with Anthem for node negative breast cancer patients and expanded coverage of Medicare for node positive patients with up to three positive lymph nodes.

Going forward, we will continue our efforts to expand additional payer policies to include patients with either micrometastasis or node positive disease. With the inclusion of node positive patients, we now have an addressable breast cancer population in the United States of more than 100,000 patients each year.

Further, as the Oncotype DX breast cancer test gains recognition of standard of care in the US, the opportunity for us to deliver its benefits to patients around the world continues to grow. In Western Europe, Japan, the Americas, and Israel we are building commercial capabilities and are targeting a worldwide addressable breast cancer population of at least 300,000 patients.

The recently announced recommendation of the St. Gallen International Consensus Panel on the Primary Therapy of Early breast cancer provides additional support for our efforts in Europe. In June, they recommended for the first time that validated multigene assays be considered as an adjunct to standard measures in helping to determine chemotherapy benefits for early-stage breast cancer patients.

These new treatment guidelines like those established by ASCO and NCCN in the US represent a significant advancement for the role of validated molecular diagnostics in breast cancer treatment planning. We believe these guidelines will support the expansion of Oncotype DX outside the US and believe in the establishment of favorable reimbursement policies, which is a necessary step to ensuring patient taxes in his important region.

As we have mentioned in past calls, we also anticipate that country specific studies will play a large role in securing reimbursement with national healthcare system. In this regard, we are encouraged to report that we recently initiated a Taiwanese, Chinese population study, in collaboration with the National Taiwan University.

Lastly, on the international front, we're pleased to report that announced staff had accepted for presentation at the 34th European society for Medical Oncology Multidisciplinary Congress. We look forward to sharing these results following the presentation in September.

Brad will now review our second quarter 2009 financial results and discuss our commercial products.

Brad Cole

Thanks, Kim. We were pleased with the strong financial results delivered in the second quarter of 2009, especially during a time of economic uncertainty. Product revenue from the Oncotype DX breast cancer test in the quarter was $35.2 million, an increase of 34% compared with $26.3 million for the same period in 2008.

Product revenue once again increased at a greater rate than tests delivered year-over-year as we continue to make progress in reimbursement and in securing payment for previously uncovered tests. In the second quarter of 2009, we delivered more than 11,880 test results, compared with more than 9,690 test results in the second quarter of 2008, representing 23% year-over-year growth.

Approximately 50% of product revenue in the second quarter of 2009 and 2008 was recorded on an accrual basis and recognized at the time that tests were delivered. Approximately, 48% of tests were recorded on an accrual basis in the second quarter of 2009, compared with 43% a year ago, reflecting the conversion of contracted payers to accrual recognition for node negative patients.

Contract revenue from our collaboration with Pfizer and renal cancer constituted the balance of revenue in the second quarter of 2009 or $1.4 million. Contract revenue all from our Pfizer collaboration in the second half of the year is expected to be somewhat less than the first half.

Our gross margin rate on product revenue for the second quarter of 2009 increased to 77.6% compared with 74.0% in the same period a year ago. This increase reflects continued improvement in our revenue yield and operational efficiencies. We believe that gross margin rate going forward will be between 75% and 80%.

Turning to operating expenses, research and development for the second quarter of 2009 increased by $1.9 million from the same period in 2008, due to increased spending related to our Oncotype DX colon cancer test, launch prepare test, and other pipeline efforts.

Selling and marketing and general and administrative expenses increased $3.9 million from a year ago, due to the expansion of our US sales force earlier in the year and growing international presence. We are beginning to see the impact of our 20 new US sales representatives, who were fully deployed in their new territories at the beginning of the second quarter.

We expect SG&A expenses to be similar to second-quarter levels during the remainder of 2009. Our net loss decreased to $3.9 million in the second quarter of 2009, compared with a net loss of $4.1 million in the second quarter of 2008.

Due to strong cash payments from payers, limited capital expenditures and fluctuations in working capital in the quarter cash, cash equivalents and investments at June 30 2009 were $55.7 million compared with $53.4 million at March 31, 2009 and $56.7 million at December 31, 2008.

As Kim mentioned, we recently achieved to reimbursement milestones. First; effective August 1st, 2009 we negotiated a contract rate of reimbursement with Anthem Insurance Company, a subsidiary of one of the largest health benefits companies in the US.

Together with its affiliates Anthem provides health benefits coverage for more than 35 million members. As with other payers under contract appropriate patients now will be able to access Oncotype DX as they covered in network test. We expect the price in terms of this contract to add to our top line consistent with our previous experience of moving payers from policies to contract coverage.

Second, we expanded reimbursement coverage with Palmetto GBA, the Medicare service contractor for Oncotype DX to cover patients with positive lymph nodes. Medicare now covers -- excuse me, Medicare now offers the broadest coverage of any payer, including both female and male patients, patients who are lymph node negative, patients with lymph node micrometastasis and those with 1 to 3 positive lymph nodes.

For non-Medicare node positive patients, we will continue our efforts to secure private coverage by working directly with all payers to expand existing policies to include appropriate node positive patients. While we believe the clinical evidence supports this change our past experience in gaining coverage for the node negative population suggests the coverage expansion for node positive patients will occur over the next couple of years.

We increased product revenues for the quarter by 34% and also increased revenue per test compared to a year ago. Specifically, earlier revenue per test for node negative US patients continues to increase and we expect future increases. Of note, revenue per test is slightly lower in the quarter compared to the first quarter.

This reflects growth in our node positive business in the US, as well as our international business that includes distributor relationships and clinical trials, which currently do not generate the same level of revenue per test as our node-negative US business. In light of these recent positive reimbursement events, I will take this opportunity to reiterate our revenue recognition policies.

Today, accrual-based revenue has been comprised of Oncotype DX testing for estrogen-receptor-positive node negative breast cancer patients. Given our expanded coverage agreement with Medicare, we will begin to accrue Medicare node positive test during the third quarter.

With respect to the Anthem contracts and as with all other payers, it is important to note that we require a period of consistent payment after a contract is in place before we begin to recognize revenue on an accrual basis. Generally, this timeframe is 9 to 12 months, if there is significant variability from one payer to the next.

Regardless, even prior to revenue being recognized on an accrual basis, cash receipts and cash-based revenue are positively impacted by moving from a policy to a contract as the payer begins paying consistently and in line with the higher contracted rate. We believe that we will realize a higher price per test delivery as we continually progress with payers for both node negative and node positive breast cancer.

Moving now to our 2009 outlook and financial guidance; we are maintaining our previous full-year guidance. As a reminder, we are estimating revenue for 2009 to be between $148 million and $160 million and expect a net loss in 2009 to be between $14 million and $7 million.

We expect earned cash delivered for the full-year will be up the low end of our guidance previously sat at 50,000 test results, in part due to a modest impact from the economy. As we enter the second half of the year, we continue to focus on our goal of moving the company towards profitability.

We're well on our way towards achieving this goal, as we continue to expand our commercial reach and reimbursement of Oncotype DX for breast cancer both in the US and abroad.

I will now turn the call back to Kim.

Kim Popovits

Thanks, Brad. As a leader in personalized medicine, we have pioneered the business model that we believe supports the development and commercialization of the multiple products in our pipeline. I will now give you a brief overview of these efforts starting with data presented at the ASCO annual meeting in May.

In breast cancer, we announced positive results from a study showing that breast cancers in men display a very similar gene signature to those in women. This is the largest genomics study to compare gene expression in male patients and results support the clinical utility of Oncotype DX and providing quantitative information to help guide treatment decisions for men with breast cancer.

We also continue to receive positive feedback from physicians and patients on the Valley of incorporating the quantitative single gene scores ER, PR and HER2 and Oncotype DX reports. With this information Oncotype DX provides additional insight into each patient's individual tumor biology.

In colon cancer, we presented positive results from the QUASAR validation study, the results demonstrated that the Oncotype DX colon cancer test can independently predict the likelihood of recurrence for stage two colon cancer patients following surgery and that the colon cancer recurrence score provided additional independent clinical value beyond standard measures of risk.

The study also confirms the importance of mismatch repair, MMR, also known as microsatellite and stability or MSI in stage II colon cancer. These results strongly support the new paradigm for assessing recurrence risk in stage II colon cancer, emphasizing the critical role of three measures.

Recurrence score MMR and T-stage. We believe that the Oncotype DX colon cancer recurrence score will provide the greatest clinical utility for treatment selection in the more than 70% of patients for whom MMR and T-stage are uninformative of. We continue to move forward with commercial commercialization plans for Oncotype DX colon cancer test and remain on track to make it available to physicians and patients in early 2010.

Our renal program continues to follow the same rigorous clinical development process that we established for our breast and colon cancer test. We completed processing of samples for our renal cancer team identification study with the Cleveland Clinic and Pfizer and will be performing analysis of these results in the second half of the year.

We were recently granted two new US patents for the Oncotype DX breast cancer test, covering methods for the algorithm used and methods utilizing genes beyond the current 21 genes said. These patterns both strengthen and broaden our Oncotype DX patent portfolio, which now includes four patents covering 73 claims and multiple genes meaningful and cancer prognosis and hormonal therapy prediction.

We believe these patterns further demonstrate our strong position in understanding the biology of cancer at the molecular level and our ability to translate this knowledge into clinical practice for cancer patients. In addition, we were also granted a patent by the European patent office providing rates to moderates monitor gene expression using intronic regions of genes.

As we evaluate programs and other tumors, we believe our science rigorous development approach, access to world-class collaborators, and commercial infrastructure provide a significant competitive advantage as we work to strengthen our leadership position in delivering personalized medicine to clinical practice on behalf of cancer patients.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from Bill Quirk with Piper Jaffray.

David Clair - Piper Jaffray

Hi everybody, it is actually David Clair here for Bill. Congratulations on the quarter.

Kim Popovits

Thank you.

David Clair - Piper Jaffray

Sure. Just a couple of questions here, if you could kind of give us a competitive update, we have heard that Agendia intends to double the size of the sales force and just curious if there is any impact to your business, if your seeing them out in the field more?

Kim Popovits

No, not seen any additional traction. You know, we continue to believe that the clinical evidences driving the day here and Oncotype DX is the test that is interactive guidelines and most widely used. So, we have not seen any change and impact from Agendia.

David Clair - Piper Jaffray

Okay. Just a quick one on colon cancer here, is there anything you can share with developing a chemotherapy response assay for colon, if you guys started working on that and any update?

Brad Cole

Yes, we are very excited about our colon franchise and our planning additional studies just as we did in breast cancer and established the value of our breast cancer assay by doing additional studies, we are excited about looking at therapy benefit in colon cancer and I guess to remind everyone, we actually have done studies on looking at good genes that might be important in the benefit from Erbitux and so as we now think about our colon cancer franchise and what we might be offering in the future, we will be incorporating the data that we generated in that collaboration into our plans for providing future values.

David Clair - Piper Jaffray

Okay. And just one last one, on guidance, it sounds like the test delivered will probably be towards the low end of the 50,000 to 53,000 range, can you just give us a little bit insight on what caused you to kind of guide people towards the low end?

Brad Cole

Yes, Dave, we looked at the results of the first half and the GAAP to get to the 50,000 and the effects of this sales force now being in a territory for the entire quarter and the improved performance, we expect to see out of them and believe that that’s the right place to be.

David Clair - Piper Jaffray

Okay, so is it -- I mean, is this the new sales force, are they kind of gaining traction to your expectations and you know I mean is it economy?

Brad Cole

Well to say, in sales force terms, yes, they are gaining traction and meet our expectations and to deliver the 50,000 tests includes improved sequential growth in assays, which we expect to have in the back half of the year.

Kim Popovits

I think we had mentioned early on that we did not anticipate the new reps to have a significant impact in the first half of the year, while we saw them give up to speed rather quickly, we have or just recently seeing of the impact of their traction and being in the territories of full time. So, we believe given the additional sales force and the trends that we have been seeing in the first half of the year that we will be within this range, but at the lower end.

And your question regarding the economy, you know as we look at the multiple factors, you know effecting healthcare today and you guys read as many as we do, clearly we believe there is some impact on our business with the economic conditions, but I will be at modest. But that has also factored into this decision as well.

Operator

Okay, thank you. Your next question comes from Peter Lawson with Thomas Weisel Partners.

Peter Lawson - Thomas Weisel Partners

Kim, did you see any discernable changes in volume during the quarter, was there any trends of things getting worse or better as the quarter ended and in the first few weeks of Q3?

Kim Popovits

Yes, I think, what I would say to you there is that the trends are getting better not worse, as we looked at our business and as you can imagine we do very carefully and have done a lot of analysis. We did see some areas of the country grow a little more slowly and we were able to correlate that somewhat to the unemployment rates, although as I just mentioned we think that that is modest, but certainly a contributing factor. As we look towards the second half of the year, we believe what the sales force fully engaged, the trends that we are seeing today are positive and we are very optimistic that we will be within this guidance range albeit at the lower end.

Peter Lawson - Thomas Weisel Partners

And then, just looking at the ex-US opportunity, what do you think is the most addressable market moment, is it that Taiwanese market place or more so of Europe?

Brad Cole

Well currently, Israel is continuing to be our strongest performer and we are as penetrated in Israel as we are in the US. I think the opportunities are pretty equal around the world. Japan would be the next in our mind. The Western Europe would be called second.

Peter Lawson - Thomas Weisel Partners

And then, wonder if you could -- is it possible to break out the number of covered life in the node positive patients?

Brad Cole

Well, the one positive coverage policy that we have in place is Medicare. Where we have got 40 million lives or so that will be covered in that sense. Turn the total population, but other than that we have limited coverage.

Kim Popovits

Right. I would also add to that, we have very few policies now in place to our expanded for node positive patients we are getting coverage from payers. So, what we're doing in node positive is similar to what we did when we launched in node negative is every decision that is made on a patient by patient basis, we work directly with the payers to do that and have them met with good success in gaining their coverage. Certainly, down the road what we would like to do is have those policies expanded, include no positives so that we are not doing each case on a case-by-case basis.

Peter Lawson - Thomas Weisel Partners

Thank you. And just back onto that sort of competitive landscape question, are there any other competitors out there you are kind of feeling the heat from?

Kim Popovits

No. There really are not.

Peter Lawson - Thomas Weisel Partners

Thank you.

Operator

Your next question comes from Charles Duncan with JMP Securities.

Charles Duncan - JMP Securities

Hi, guys congratulations on a nice quarter of progress.

Kim Popovits

Thanks, Charles.

Charles Duncan - JMP Securities

I had a couple of questions regarding – first of all back to that sales force, I know that you are seeing some impact to how you have characterized that, but how might we understand that impact, can you quantify or just provide a little color is that new physicians seeing these people or are they seeing more frequently or some measure of progress?

Brad Cole

The opportunity presents ourselves too, as soon as we have got new reps in the field as the opportunity of (inaudible) more frequently. So we're seeing both growth from new doctors and a greater penetration existing physicians and we're seeing growth both in existing territories and in new territories we are in, new representation.

Charles Duncan - JMP Securities

So, new docs taking a look of seeing, but sample flow perhaps in the second half of the year, correct?

Brad Cole

Well we think the second half of the year will be increased sample flow as the new representatives get better traction. Yes, so we're starting to see that already.

Charles Duncan - JMP Securities

Another question I had is back to the International, (inaudible) you could provide a little bit more color on the timelines for seeing that being more visible in terms of sample floor out of Europe, is that going to really a 2011 story or is it going to be in 2010?

Brad Cole

The sample floor today is -- already exits and so we think the ability to have that make a more meaningful difference on the revenue line is going to be more like 2011/2012. Progress reimbursement is going to take some time, but we are seeing higher rate of growth of international markets then we are here in the US, already when it turns to samples, Charles.

Charles Duncan - JMP Securities

Okay. And then, can you give us some additional thoughts on some of the other call it indications you are working on, I believe that you are working, you mentioned renal cancer with Pfizer, perhaps are you working on prostate cancer in addition to colon and is there a time such as an analyst meeting that it might make sense to kind of roll out the breadth of the platform?

Kim Popovits

I think it reminds Charles. Yes, I will let Steve comment on the programs, but as you know we have a pretty rich pipeline in one of the thins that we have talked about off late is pulling together on Analyst day at some point in the future because we do think it is important that folks are able to see the broader programs and learn a little bit more about what we're doing and the competitive barriers that we're building, but with that said you know of course colon is our next area of focus, but there are many things coming behind us. So, Steve do you want to maybe highlight today just a couple of those?

Steve Shak

Yes, certainly behind that. Again, we talked today about our venal program about the fact that we have samples and have completed processing samples in-house and anticipate doing analysis later this year.

In terms of prostate cancer again, we are actively planning those studies and have done studies in-house that have shown that you know our technology is capable of looking at a very small amount of tissue that we need to look at in terms of doing prostate cancer studies.

And again, we shouldn't forget breast cancer as well. We are in the process of securing breast cancer samples for patients who are diagnosed with DCIS with a goal of initiating studies this year and we have remained committed again to that area of investigation. So, with regard to an Analyst Day there is a lot to talk about.

Charles Duncan - JMP Securities

Thanks for that added color Steve. One final question, which is kind of financially oriented, you mentioned Brad being going from policy to contract with Anthem that you did what you usually do, I assume that that includes a little bit of a discount can you provide us some additional insights on what that means in terms of versus list, what Anthem or anyone like that is paying, is it roughly 10% or --?

Brad Cole

Anthem is much like the other payer contract that we signed previously on node negative breast cancer and that there is a small discount offer this price, it is quite unusual that we would be above 10%, there is only minor exceptions, so generally a single-digit discounts offer this price.

Charles Duncan - JMP Securities

Okay, and the current listing --

Brad Cole

In the Anthem case, there is $3,820 in this case currently this price is $3,975.

Charles Duncan - JMP Securities

Okay, good. Thanks for the added color. Congratulations.

Kim Popovits

Thanks, Charles.

Brad, Cole

Thanks.

Operator

(Operator instructions) Your next question comes from Scott Gleason with Stephens Inc.

Scott Gleason - Stephens Inc.

Hey guys, thanks for taking my question.

Kim Popovits

Hi, Scott.

Scott Gleason - Stephens Inc.

The first question, Kim, I guess when you look at the positive covered physician for Medicare where they are looking at covering everybody with less than three parts of lymph nodes, can you give us an idea of what kind of total coverage population that might open up just in terms of the number of Medicare patients that would apply to?

Kim Popovits

Number of Medicare patients? Well, if you look at the whole market, you would you are probably in the neighborhood of -- with positive lymph nodes 20,000 or so patients that would qualify in this, group. Medicare currently represents around 20% of our business. So you could apply that percentage to it.

Scott Gleason - Stephens Inc.

So, maybe 4,000 or 5,000 patients in total?

Kim Popovits

That is correct.

Scott Gleason - Stephens Inc.

Okay, great, thank you. And then I just Kim -- we start looking at the colon cancer assay in the upcoming commercial launch, can you maybe walk us through when we think of more kind of cost of goods sold standpoint what is the total COGS of that test will be kind of relative to your overall breast test? And then also walk us through, is there any infrastructure costs that you guys are going to take on over the next – you know couple of quarters here, you know to ramp up to be ready to launch that test?

Brad Cole

Yes. The nice thing about the colon cancer test as it runs on the same platform as the breast cancer test. So, there aren't a lot of significant infrastructure cost just put in place, to be able to run the test and it will be a sum what more expensive, but not material so within the breast cancer tests are run just because it is early days and training and -- will be place, but other than that very similar.

Kim Popovits

And I think, we can also expect to gain leverage across the commercial infrastructure that has been built when you look at the coverage of payers giving policies and contracts accomplished there and also with the sales reps says there is a pretty significant amount of overlap in the treating physicians for these patients.

Brad Cole

Let me add on to that (inaudible) nuance, you are asking about the cost of the test, probably the bigger impact as when colon launches you won’t have reimbursement in place to start with. So, it will be a process of getting reimbursement in place so you'll start to see the cost of the test in our P&L, majority revenue from it. So there may be a little margin pressure not because it is so much more costly to process, but because we are not getting paid, initially, in real time. Sure it is like node-negative and much like node positive that would be the real impact of launching colon in terms of the margin effect.

Scott Gleason - Stephens Inc.

Sure, and then I guess you guys had said that the cost will be higher, imagine at the short-term costs and long-term just about you get more experienced by the (inaudible) volumes, it feels closer to what you get here up in breast cancer, is that it?

Brad Cole

That is correct.

Scott Gleason - Stephens Inc.

Okay. And then this last question, Kim is more kind of a big picture strategic questions, is there initially if I guess by Genomic Health to maybe launch some of the more commoditized test for cancer they have been developed right now such as (inaudible) a means to get samples in-house?

Kim Popovits

Yes, we have had conversations including all of the above and so we are right now evaluating what role we should be playing and being able to provide some of these additional markers, as you know we have done it with Oncotype DX breast cancer by providing ER, PR, and HER2 and as we look towards launching the colon cancer test we are certainly aware that there is some additional markers there that maybe useful for patients that we may want to provide along with the test. So, that is being evaluated right now and we will announce that as we move closer to launching the colon cancer test.

Scott Gleason - Stephens Inc.

Okay, thanks for taking my questions guys.

Kim Popovits

You are welcome.

Operator

Your next question comes from Ashim Anand with Natixis Bleichroeder.

Ashim Anand - Natixis Bleichroeder

Thanks. Couple of questions, first for regarding the Taiwanese study you are doing and also if I remember correctly, you had announced you were also doing a Japanese study, I was wondering what is the logic in terms of, you know when you go in those local markets is it that they kind of want these studies or in scientific community there is a belief that there would be racial difference in terms of other scores?

Brad Cole

That is a great question. The answer is really yes to both. I think that certainly for other products and it is not different for Oncotype DX in Japan and in Taiwan there is lot in the question. Are the ethnic differences going to lead to differences in the individual biology that we would be looking at and so actually, I think I can give you also the answer because in April Dr. Troy presented one of the largest Japanese breast cancer meetings. The results of his study that looked at 200 patients in Japan who had no negative breast cancer and he was very pleased to report that the returning score actually clearly did show that the low recurrent score patients in Japan had a very, very low risk of recurrence and the high reoccurrence score patients had a high risk. So, it both addressed an important scientific question for them and obviously it plays the role in that countries own evaluation of the role and impact of testing in their patients. So, those efforts certainly were advanced by performing that study.

Ashim Anand - Natixis Bleichroeder

Wonderful. Any regulatory updates you have in terms of IVD MIA. You are hearing from those guys?

Kim Popovits

No, new news on that front, I am only to say that dial 1 continues with many of the stakeholder groups in terms of moving forward with a regulatory pathway that we believe would be I think the world might be more modernized for these kinds of tests, but for right now clear remains the pathway. I mean there has been no new news regarding any clarity around a new pathway or structure to take these tests through.

Ashim Anand - Natixis Bleichroeder

Okay. And finally, if you can give us time lines on the Oncotype product extension on DCIS and Taxin [ph], if you have provided it previously or if you are willing to provide now?

Brad Cole

We are not providing the timelines for those others than to say for DCIS we are very excited about that program and will be initiating studies this year. Obviously, will then look at the data and if the day is exciting, certainly move that forward as quickly as we can.

Ashim Anand - Natixis Bleichroeder

Thank you, guys.

Operator

Your next question comes from Tycho Peterson with JPMorgan.

Abigail Davis - JPMorgan

Hi, this is actually Abigail Davis [ph] sitting in for Tycho today. You know, I just have a quick follow-up on the international markets point bought up earlier, with distribution agreement signed in Brazil and Venezuela last quarter, could you just kind of remind us about what percent of your current samples process come from outside the US and then if the guidance you have for the full-year of 50,000 does that implies any meaningful change in the international mix shift for the second half?

Brad Cole

Volume outside the US to date has been running less than 10% and we would expect given that the international business and sample flows growing at a faster rate than the US business that will continue to grow and so in the second half of the year respected to be moving closer to 10% that is certainly below 10% a day.

Abigail Davis - JPMorgan

Okay, great, thank you.

Operator

Your next question comes from Matthew Scalo with Canaccord Adams.

Matthew Scalo - Canaccord Adams

Hi, guys. I just wanted to ask two quick questions here, the product gross margin is that roughly similar to what was seen in the first quarter, meaning roughly about 76.5, 77%?

Brad Cole

This quarter, it was 77.6% and the first quarter was just above 76.5. So there has been a slight improvement in gross margin during the year.

Matthew Scalo - Canaccord Adams

Largely based on volume?

Brad Cole

It is largely based on pricing really. We continue to see a 3,000 odd price and there has been a little bit of improvement in cost per test in terms of processing in the current year. And if you look at on a year-over-year basis, we saw almost a 4% improvement in gross profit, most of that is driven by pricing yields, where last year it was about $2,700 in the second quarter of 2008 per tests and it is now about $3,000 per test here in the second quarter of 2009.

Matthew Scalo - Canaccord Adams

So you had about a 4.5% bump up in price about this time last year, do you anticipate raising in price with the current economy?

Brad Cole

Recently, we just did raise price and sort of list price in the US on July 1st of $3,975 that does not have a material impact on our realized recognized price for a period of months until contracts were over. So, that would not be the reason that we are seeing increased yield that is because we are seeing more and more payers come on to contracts and those are on contracts yet increasing their payments levels.

Matthew Scalo - Canaccord Adams

Sure, but it is a good sign nonetheless. Can I switch over to kind of the marketing spend that you anticipate to kind of create a brand around your colon cancer test? Should we expect to see some cause and I am thinking physician education, seminars what have you starting in kind of around the fourth quarter and moving forward or do you wait until you launch it through the clear lab and may we start that up with, I guess direct through your sales force contacts?

Brad Cole

Well, those activities won't start in earnest or closer to the launch, but they are included in our current -- certainly in 2009, our current level spending in guidance and the references we made in the script, but that will be included in our guidance for 2010 when we bring that out in February next year.

Kim Popovits

So, the pre-launch activities have been accounted for in the budget that you have or guidance you have been given.

Matthew Scalo - Canaccord Adams

Okay, terrific, thank you very much.

Operator

Your next question comes from Kelley Roche with Leerink Swann.

Kelley Roche - Leerink Swann

Thanks for taking the question. First at looking at the ramp for the commercialization of the colon cancer assay, can you let us know if you have submitted that to CLIA, you know the infections from New York State, is that kind of has that happened, what may expect for the rest of the year for that?

Kim Popovits

Yes, it will be a test launched under CLIA and we will follow the requirements through CLIA and through New York states to do that, so those have not been done yet and won't be until we get closer to launch?

Kelley Roche - Leerink Swann

Okay, so sort of --.

Kim Popovits

But, they are on track.

Kelley Roche - Leerink Swann

Okay, on track. Alright and do you guys thinking of -- looking back at the sales force I know you have said, you know you are going to get some leverage there with the breast cancer dedicated sales force, do you expect to maybe add, more to the dedicated to the colon cancer assay?

Kim Popovits

Yes, we have not made that decision yet or announced any plans to do that, but it is likely that at some point you know as we move into 2010 that we may look at increasing this group a bit, as we look towards the overlap in the customer audience and newer areas that we may want to access with having two products instead of just one. So, again we have not made the decision, but it is certainly under consideration right now.

Kelley Roche - Leerink Swann

Okay. And then one last thing, you know, looking at the European expansion have you added to the headcount over there to sort of account for what you think could be this continued growth in the samples -- the sample test per year?

Brad Cole

We have. The headcount outside the United States includes you know obviously, the activities we have in Asia as well, but it is a small sort of headcount today, it is a combination of employees and consultants and working through distributors we have more resources on the ground than ever before, but it is still relatively small and trying to size it to the opportunity at least in the short-term because reimbursement is yet to come on line, but we are continuing to invest in that area.

Kelley Roche - Leerink Swann

Okay, thanks.

Operator

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

Kim Popovits

Yes, thanks to everyone for your participation today and for your continued interest in Genomic Health. I look forward to seeing some of you at the upcoming Canaccord Adams conference in Boston. Have a great afternoon.

Operator

This concludes today’s conference. You may now disconnect.

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Source: Genomic Health, Inc. Q2 2009 Earnings Call Transcript
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