Genomic Health's (GHDX) CEO Kimberly Popovits on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Genomic Health, (GHDX)

Genomic Health (NASDAQ:GHDX)

Q2 2014 Earnings Call

August 07, 2014 4:30 pm ET

Executives

Emily Faucette -

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

G. Bradley Cole - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Secretary and Member of Non-Management Stock Option Committee

Steven Shak - Executive Vice President of Research & Development

Analysts

David C. Clair - Piper Jaffray Companies, Research Division

Douglas Schenkel - Cowen and Company, LLC, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Rafael Tejada - BofA Merrill Lynch, Research Division

Nicholas Abbott - BMO Capital Markets Canada

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's Second Quarter 2014 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's conference call to review our second quarter 2014 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 and focus of our business strategy, economic benefits and value to payors of our tests, growth opportunities including international, DCIS and prostate, future products, technologies 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 outcome and timing of clinical studies and publications, and our expectations regarding potential FDA or other regulation, constitute forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act. We refer you to our quarterly report on Form 10-Q for the quarter ended March 31, 2014, 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 the call today are: Kim Popovits, our Chairman of the Board, Chief Executive Officer and President; Brad Cole, our Chief Operating Officer and Chief Financial Officer; and Steve Shak, our Executive Vice President of Research and Development. I'll now turn the call over to Kim.

Kimberly J. Popovits

Thanks, Emily. Good afternoon, everyone, and welcome. In the second quarter of 2014, we delivered record revenue with 17% growth in test volume and double-digit revenue growth. This impressive result was achieved by continuing to increase penetration of the U.S. invasive breast cancer market, as well as continued international adoption and reimbursement success. Further, we recently announced positive results from 2 additional large clinical validation studies in DCIS breast cancer and prostate cancer, both of which are large new markets representing nearly 200,000 patients in the U.S. alone each year.

In DCIS, results of the landmark study analyzing an unprecedented collection of DCIS tissue samples representative of a contemporary patient population confirmed and extended the conclusions of the ECOG study published in 2013. Additionally, these results demonstrate for the first time that the Oncotype DX DCIS Score predicted the risk of local recurrence in a group of patients treated with radiation therapy in clinical practice. Our collaborators at the Ontario DCIS study group in Canada have submitted complete data for presentation at the San Antonio Breast Cancer Symposium in December.

And in prostate cancer, yesterday, we announced positive top line results of an additional large independent study to evaluate the ability of our Oncotype DX Genomic Prostate Score to predict multiple clinical endpoints related to disease aggressiveness in low and intermediate risk patients. The study, conducted by the Center for Prostate Disease Research, or CPDR, met its primary endpoint predicting biochemical recurrence: a rise in PSA following surgery, which is a longer-term measure of outcomes for aggressive disease. The study also reconfirmed the original adverse pathology endpoint of a successful UCSF validation study published in May. We believe the positive results from these studies, to be presented at medical meetings later this year, will help drive further adoption and reimbursement of both our DCIS and prostate tests.

In the quarter, we are pleased to report prostate test adoption accelerated at a strong pace resulting in a 54% increase in test volume compared with the first quarter of 2014. To date, approximately 900 urologists have ordered the Oncotype DX prostate cancer test, up 30% compared to the prior quarter, and more than half of these physicians have now ordered tests for multiple patients. We believe these results demonstrate physicians' recognition of the clinical value of Oncotype DX, the only prostate cancer test developed for low and intermediate risk patients, those most likely suitable for active surveillance.

We experienced a strong increase in test orders during the back half of the quarter, following European Urology's publication of the UCSF validation study and our strong clinical and commercial presence at both the AUA and ASCO meetings, where additional new data were presented. And finally, during the quarter, we completed our first prostate cancer decision impact study and are in the process of submitting these results for presentation and publication. To drive further adoption and reimbursement, we will, in the second half of 2014, undertake the following actions: submit full results of these recently completed studies for medical meeting presentation and peer-reviewed publication; continue to answer important clinical questions and increase physician experience through additional decision impact and observational studies, as well as payor demonstration projects; and continue to invest in our U.S. urology commercial efforts with the deployment of our expanded sales force and development of additional physician and patient educational programs. We believe these actions, in addition to the acceptance and publication of the CPDR and decision impact studies, could lead to meaningful reimbursement in 2015.

I will now turn the call over to the team to provide further detail on our second quarter financial results, our worldwide commercial and operations progress, and recent pipeline and clinical updates. I'll then conclude with our business priorities for the remainder of the year. Brad?

G. Bradley Cole

Thank you, Kim. In the second quarter, we delivered strong financial results and achieved important commercial milestones across the U.S. and international markets. Specifically, we delivered revenue of $70.5 million compared with $63.7 million for the second quarter of 2013, an increase of 11%, due to strong cash revenue and test growth. As expected, all revenue in the second quarter was from product revenue.

In the second quarter, more than 24,050 Oncotype DX test results were delivered, an increase of 17% compared with more than 20,650 test results delivered in the same period in 2013. This reflects continued strong international test growth of 32% and continued penetration of the U.S. breast cancer market, with a share above 90% demonstrating the consistent strength of our breast cancer market leadership. This, the U.S. invasive breast cancer market penetration, is now approximately 62% of the estimated available market.

We continue to see increased worldwide adoption of Oncotype DX in invasive breast cancer with 13% growth compared to last year. The balance of test growth came primarily from our new prostate cancer test, which continues to be a focus of our U.S. commercial investment. We expect further prostate contributions to test growth in the back half of the year given the recent publication of the UCSF study and expected presentation of the new CPDR study later this year. The continued success in the adoption of a prostate cancer test should result in approximately 10% of total test volumes coming from prostate by the end of the year.

62% of tests delivered and 72% of product revenue were recorded on an accrual basis in the second quarter. Our gross margin rate was strong at 83% assisted in the quarter by higher cash revenue. Excluding our prostate test volume, where there is no reimbursement in place, our gross margin would have been over 84%. We anticipate a rate of approximately 82% going forward as we continue to increase prostate test volume ahead of broadly established reimbursement.

Total operating expenses for the second quarter of 2014 were $75.1 million compared with total operating expenses of $66.6 million for the comparable period in 2013. This increase reflects planned sales and marketing investments to address both international and prostate opportunities. Most of the growth in our spending was in our commercial channel, as we continue to build international markets in parallel with our dedicated prostate commercial team in the U.S.

Net loss in the second quarter was $4.6 million compared with net loss of $3 million in the second quarter of 2013. The net loss narrowed compared to the first quarter due to stronger top line performance and lower R&D spending.

Looking ahead, we anticipate third quarter revenue to be similar to second quarter levels given the historic summer slowdown and cash revenues at normalized levels. We do not anticipate any collaboration revenue during the third quarter.

We expect net loss in the third quarter to be greater than the second quarter due to increased R&D spending and continued planned investments in the U.S. DCIS, prostate cancer and international markets in order to position ourselves for rapid growth in all of these areas. We anticipate the second half net loss to be similar to our first half net loss. These loss levels will be reduced substantially in 2015 with improved leverage from these new areas. We expect this leverage, already well demonstrated in our breast franchise, to lead to improved results over time from continued penetration in our U.S. invasive breast cancer market, continued strong growth in international markets, a ramp in our DCIS product following presentation of full results in San Antonio, and the beginning of reimbursement traction from our prostate franchise here in the United States. With all of these investments beginning to pay off in 2015, we expect the top line growth to accelerate in 2016 leading to full year profitability.

It's important to note that today, operating income from our worldwide breast cancer franchise is approaching 20% of revenue even while we build and invest in the direct markets of Western Europe. In the years following full U.S. reimbursement of our prostate cancer test and as penetration ramps, we expect that increasing top line growth and further leverage in the business will result in operating income that may equal or exceed today's worldwide breast cancer franchise operating income, which, as mentioned, approaches 20% of revenue.

Our accelerated investment outside of the United States in order to realize the significant international opportunity has continued to generate substantial growth this quarter, along with the achievement of multiple noteworthy milestones. International test volume and revenue continued to grow approximately 30% year-over-year, and international test volume represented approximately 20% of total test volume in the second quarter. While we are well penetrated in certain international markets, for the most part, our international penetration levels are below 10%, representing a significant opportunity for further growth, especially in Western Europe. During the quarter, we achieved multiple milestones that support our efforts to increase international penetration, including a signed agreement in the Canadian province of Alberta covering nearly 4 million lives, bringing total lives covered to more than 86% of Canada's population or approximately 30 million lives. In Spain, the Agency for Health Technology Assessment of Andalusia published new guidelines recommending Oncotype DX as the only breast cancer test to predict chemotherapy benefit in early-stage, hormone receptor-positive, invasive breast cancer. In addition to its impact in Andalusia, the most populated region in Spain, this report is serving as a reference for other regions that have not yet performed evaluations of genomic tests.

And in Mexico, the private health insurer, AXA, granted reimbursement for the Oncotype DX breast cancer test covering more than 1 million lives.

With these latest accomplishments, we now have more than 120 million international lives covered for our breast cancer test and anticipate further strong test and revenue growth outside the United States. I will now turn the call over to Steve to discuss recent clinical milestones and pipeline updates. Steve?

Steven Shak

Thanks, Brad. During the second quarter, we delivered significant clinical accomplishments in 2 of our largest near-term opportunities, with positive DCIS breast cancer and prostate cancer study results that Kim described earlier. Peer-reviewed publication of 3 prostate cancer studies and multiple data presentations that continue to highlight the distinguishing features of the development and clinical utility of these tests. In May, the journal, European Urology, published results from the UCSF clinical validation and Cleveland Clinic development studies demonstrating that the Oncotype DX prostate cancer test is a significant predictor of disease aggressiveness at the time of diagnosis, before intervention with radiation or surgery, and that it provides more precise and individualized risk assessment beyond that currently available to help physicians and their prostate cancer patients confidently choose the most appropriate treatment. At the same time during the AUA annual meeting, we presented positive results reinforcing the robustness of the Oncotype DX prostate cancer test development, with a subanalysis from one of the original development studies that included 185 prostate cancer patients, who experienced biochemical recurrence or a rise in PSA following surgery. The results showed that the Oncotype DX prostate cancer test was predictive of clinical recurrence for all patients regardless of whether they received hormonal therapy, radiation therapy or no therapy at all at the time of biochemical recurrence. For each therapy subgroup, different biological pathways within the test were more highly associated with patient outcome. These results underscore the importance of incorporating genes from multiple pathways that are highly significant in providing actionable outcomes from the distinct biology patterns within prostate cancer tumors at the time of biopsy. With now 10 prostate cancer studies, including more than 1,100 patients, we have developed and validated the only test that is validated in entirely low-risk, contemporary U.S. patient populations for whom a test is most relevant and most needed. The only test that has met the most actionable endpoint of adverse pathology, that is, the likelihood, based on Oncotype DX analysis of the needle biopsy tissues, that higher-grade or higher-stage disease might be present in the prostate, giving them, physicians, the confidence to put many low-risk patients on active surveillance and helping physicians identify those patients who might be missed by conventional measures that could benefit from more aggressive treatment. And the only test that includes multiple genes and pathways that were selected as described in the recent European Urology publication, not only because they predicted long-term clinical recurrence or prostate cancer death, but also because they address the known substantial challenges of prostate tumor heterogeneity and undersampling when only small amounts of needle biopsy tissue are available for review and analysis. These are the factors that differentiate Oncotype DX from other tests. Based on the exciting results from the CPDR study, we believe we are both differentiated and well positioned to accelerate adoption and the timing for prostate reimbursement.

In DCIS, an increasingly detected and often overtreated subgroup of breast cancer affecting more than 50,000 women each year in the United States alone, we announced positive top line results from our second large independent validation study in June. This population-based study conducted by the Ontario DCIS study group in Canada, met its primary endpoint by demonstrating that the Oncotype DX DCIS Score predicts the risk of local recurrence, defined as either the development of a new invasive breast cancer or the recurrence of DCIS in the same breast. These results confirmed and extended the conclusions of the previously published validation study performed by the ECOG-ACRIN Cancer Research Group. Additionally, and for the first time in this largest genomic study in DCIS to date, the Oncotype DX DCIS Score predicted the risk of local recurrence in a group of patients treated with radiation. At ASCO, we presented results from the first DCIS decision impact study, demonstrating that the Oncotype DX DCIS Score changes treatment recommendations for 1 in 3 patients, consistent with findings among previous invasive breast and colon cancer decision impact studies. Notably, of the 84 patients initially recommended radiation prior to Oncotype DX testing, 26 patients were recommended no radiation after getting the Oncotype DX testing. 26 patients were recommended no -- I'm sorry. 26 patients were recommended no radiation prior -- I'm sorry. I'll say that again. Of the 86 patients initially recommended radiation prior to Oncotype DX testing, 26 patients were recommended no radiation after getting the DCIS score result thus sparing them unnecessary and potentially life-long side effects. On the other hand, importantly, of the 31 patients initially recommended not to receive radiation prior to Oncotype DX testing, 10 patients were recommended radiation after getting the DCIS score result, thereby ensuring these patients received the potential benefits of treatment.

Additional ASCO presentations continue to highlight the distinguishing features of our product that drive their widespread use by physicians, inclusion in guidelines and reimbursement coverage, including positive results of a large study that confirmed the Oncotype DX breast cancer test predicts late recurrence, 5 to 15 years out, in early-stage patients after initial tamoxifen therapy, suggesting that the test results may help identify which patients have greater potential to benefit from extended hormonal therapy beyond 5 years. As recognized by ASCO's guideline update in June, studies have shown that extending tamoxifen treatment for 10 years is associated with improved outcomes. By confirming that Oncotype DX can help better define who is greatest risk for late recurrence and could potentially benefit from extended tamoxifen, we continue to address additional critical questions that physicians and their early-stage breast cancer patients face.

Results from a fifth direct comparison study in breast cancer were also presented at ASCO, confirming once again that Oncotype DX is different from other prognostic multi-gene tests. The study found a high level of discordance between the Oncotype DX recurrence score and the ROR prognostic gene signature. This provides additional evidence, reconfirming the published findings from the independent ATAC comparison study that showed that the Oncotype DX recurrence score and ROR classified patients differently across risk groups. When the question is whether or not to use chemotherapy, the Oncotype DX breast cancer test remains the only test that has been appropriately studied and validated to answer that specific question for invasive breast cancer.

Turning then to our R&D pipeline. Our goal is once again to revolutionize the way cancer is treated by offering noninvasive liquid biopsy tests using our proprietary liquid platform on blood or urine samples to measure the presence and burden of cancer, as well as the sensitivity or resistance to specific drugs. During the second quarter, we initiated our first clinical study using our proprietary liquid biopsy platform to evaluate its ability to reveal important tumor information from blood or urine. Multiple study sites are now open and more than 200 breast and bladder cancer patients have been enrolled in these early research studies. Due to the potential to reach across multiple tumor types, we believe our liquid platform could address markets larger than our current breast and prostate cancer opportunities.

In addition, with regard to our next-generation sequencing efforts to identify new genes associated with breast cancer prognosis and chemotherapy benefit, we recently completed sample processing using RNA-Seq to examine the whole genome comprehensively. All of the quality-control measures that are critical in this study are meeting specifications. The team is on track to complete this first, large cooperative group study with SKLOG [ph] later this year and its results, combined with similar NGS studies we have conducted in the past, are aimed at utilizing NGS technology to achieve clinically relevant milestones in forming the development of enhanced genomic tests of the future. In conclusion, it has been a productive few months for the R&D team and we look forward to sharing more detail on our DCIS and prostate cancer studies at medical meetings later this year. I'll now turn the call back to Kim.

Kimberly J. Popovits

Thanks, Steve. Before closing, I want to acknowledge FDA's notification last week to Congress of its intention to issue direct guidance for the regulation of laboratory-developed tests. Over the past 8 years, we have worked with FDA to develop an appropriate regulatory pathway for laboratory-developed tests that both meets the needs of patients and supports innovation. Their plan to issue guidance has been anticipated for some time and we expect that the draft will address some of the industry concerns by incorporating a risk-based approach, as well as a transition period for tests currently regulated by CLIA. As a leader in the rapidly evolving field of advanced molecular diagnostics, we will continue to work with FDA and other stakeholders in this ongoing process to resolve additional critical issues. With the most rigorously studied and validated tests in breast, colon and prostate cancers, we're confident in our ability to meet the requirements of the regulatory pathway ultimately established.

Since 2004, the Oncotype DX breast cancer test has helped more than 100,000 patients around the world avoid chemotherapy and its side effects while providing more than an estimated $2.5 billion in treatment cost savings to the health care system. Across invasive breast DCIS, prostate and colon cancer, we have now delivered Oncotype DX test results to more than 465,000 patients in over 70 countries. Looking ahead, we plan to expand on our ability to make cancer care smarter by delivering a pipeline of innovative tests that will empower patients at every stage of their cancer journey. While we know this is an ambitious goal, we are confident that our teams, supported by our innovative and proven business model, can achieve this goal, delivering better outcomes in cancer care while building shareholder value. In the near term, we've remained diligently focused on following 2014 priorities to expand our global commercial impact, including: investing to increase adoption of our tests across 3 major cancers to include new, large opportunities in DCIS, prostate and international; delivering top line revenue growth; presentation of complete results from our latest DCIS and prostate cancer studies; completing our first study with our proprietary liquid platform; and completing our next-generation sequencing gene identification study in invasive breast cancer. With the achievement of important clinical and commercial milestones during the second quarter, combined with additional positive data in DCIS and prostate cancer, we have taken important steps to see further leverage across our business with our long-term goal to deliver $1 billion in revenue in 2020. With our proven track record, resources and world-class talent, we are well positioned to achieve this goal.

I'd now like to open the line for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Bill Quirk with Piper Jaffray.

David C. Clair - Piper Jaffray Companies, Research Division

It's actually Dave Clair here for Bill. So I was just hoping maybe you can talk about your initial conversations with the payors on prostate, what kind of progress are you seeing there? And you actually talked about greater than 90% market share in the breast side. I think that's a little bit different than what you've said in the past of 90% share. Do you think you might have lost a little bit of share and you're taking it back?

G. Bradley Cole

Okay. Well, I guess, the first question -- the last question first. Our share has been in the 90% to 92% to 93%. It's bounced around a little bit. I think we have to admit it's an imprecise measure, so it continues to be above 90%. And so we continue to see strong growth -- well, strong market share and continued growth in that market. So I hope we didn't throw you by the way we characterized it, but it's been above 90% as long as I can remember and between 91% and 93% for the last 6-or-so quarters. As far as prostate, it's early days. Getting the first published study back in May was a terrific milestone. And we know that it's going to take multiple published studies, and so the second study that both Kim and Steve referred to is a terrific step towards reimbursement. So with these great results, which we can't talk about all the detail today, but having publication following the presentation of the results will be well on the path to reimbursement progress into next year. Those conversations are early. There's very much interest in talking to us because we know it's an overtreated disease and I think the payors will be delighted with the data we'll be able to show them.

David C. Clair - Piper Jaffray Companies, Research Division

Okay. And then, sorry, one more on R&D. Is this the run rate to think about going forward? It was a little bit lower than what we were looking for.

G. Bradley Cole

Yes, that's right. R&D was down sequentially, but we think that's just a temporary -- just a change in some spending and we think spending will be back at more the Q1 levels or maybe a little higher in the back half of the year as we've got a number of activities. Some kicking off, some winding up. The NGS study, for example, will be finishing up here in this back half of the year, so spending will move back up. Although, over time, we do see R&D coming down as a percent of revenue. And I think in this year, it will be down a little bit from last year.

Operator

Our next question comes from Amanda Murphy with William Blair.

Unknown Analyst

[indiscernible] for Amanda. Would you guys be able to comment on the announcement of LabCorp today for United Health covering the Prosigna? I mean, how does that work? I mean, you guys are both covered by United Health. Does it come down to kind of the physician's decision, where he sends the patient or could you just comment on that overall?

Kimberly J. Popovits

Yes, I think you've got that right. I mean, at the end of the day, the physician orders the test. And one of the things that was pretty clear in the announcement, I have to say we haven't been spending today looking at the details of it, but it was clear that it was around their label, which is not for chemotherapy benefit. So to the extent that physicians are ordering the test to predict chemotherapy benefit or a decision to use chemotherapy, clearly, it's not intended to do that. It's possible. My guess might be that this is just an arrangement under the capitated agreement that LabCorp has with United, but I'm not certain. I don't know that they've actually changed their medical policy. I haven't taken a look at that yet, but this is probably something that's just part of the LabCorp agreement with United.

Unknown Analyst

Okay. And then just one on prostate. Is that more of a mid- or late 2015 for reimbursement, and are you guys getting paid for any of those tests?

G. Bradley Cole

The comments there that, are that -- now that we've got our second study and we know what payors need, and if things move quickly, it's possible we could see some meaningful reimbursement in '15. We haven't changed our view that most of reimbursement is going to be more like in '16, but there could be meaningful movement in 2015. What was the second part of your question?

Unknown Analyst

So, like, the test, looks like you did almost 1,000 in the quarter, is that... Are you getting paid for that at all?

G. Bradley Cole

Oh, yes, reimbursement. There's very limited revenue. There is nobody that pays for it. There's no medical policies. Today, with the publication, we're now in a position to appeal tests when they get rejected. So we think there'll be some revenue in the back half of the year, but it's going to be immaterial.

Operator

Our next question comes from Doug Schenkel with Cowen.

Douglas Schenkel - Cowen and Company, LLC, Research Division

My first question is really just a housekeeping question. I believe weather negatively impacted volumes in the U.S. last quarter. Did you recover any of that lost volume? And if so, would you be willing to quantify the impact?

G. Bradley Cole

Yes, I think the way we looked at Q1 was that there was some impact that may have been as much as a $1 million or a few hundred tests. In those areas, we've seen continued good performance in the second quarter, but we can't say that we've recovered all of it, and we would think some of that -- we've had some recovery. But like we said last quarter, if we recover all that, it'll be across the year, and we think that's how it's played out. The strong performance this quarter was both test growth but it was also strong cash revenue, which had been a little weaker in Q1. So cash revenue does move around, but the great quarter isn't due to just those cold-weather areas. It's strength across the business.

Douglas Schenkel - Cowen and Company, LLC, Research Division

And then my second question is on prostate. You have hired additional sales reps this year, a bunch of those at the beginning of the year. Is it too early to talk about how productivity is evolving there in any way you want to measure it, including, I guess, one that you have talked about is getting folks who are using Oncotype for prostate to reorder? And then, I guess, another part to that question is just could you give us any color on the o US status of sales efforts as it relates to prostate?

G. Bradley Cole

Yes, so we have increased the sales team in prostate across the year, both in Q1 and Q2, and I'd have to say our experience with breast is a good marker for this. It takes 6 to 9 months for a rep to be fully productive. Although we've seen increasing tests per rep as you saw the strong growth that Kim referred to in Q2 being more than 50% over Q1. So we would expect to continue to see growth come out of this team as productivity improves. There's a lot of room -- a lot of places to be all at once and we think that productivity will go up over the back half of the year. We don't intend to expand the sales team in the back half of the year. We do expect that we will see tests continue to grow. We should note that more than half of the urologists who ordered have reordered. And in a launch here, when we're adding so many new customers every quarter, that's a really strong number, terrifically strong number. Outside the United States, it's really early days and we're very focused on breast cancer and are still deciding where the opportunities lie and our resources are 100% focused on breast.

Douglas Schenkel - Cowen and Company, LLC, Research Division

Okay. Now that's helpful. And yes, really, I know it is early days for breast -- I'm sorry, for prostate, in the U.S., but it does seem like you guys are tracking maybe even a little bit ahead of plan, productivity-wise, relative to what I think you did back in the early days of breast. So again, I don't know if maybe I'm putting a little too much emphasis on that in the first couple of quarters of the buildout, but it certainly seems like you're doing as well, if not better, than maybe one could have expected in early days.

Kimberly J. Popovits

No, that's true. You're exactly right, and we're very pleased with the performance.

Operator

Our next question comes from Isaac Ro with Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just on prostate, 2 questions as well. One regarding, I think, your earlier comment that you thought it will be 10% of volume by year end. I just wanted to confirm that, that was sort of the exit run rate you expect and not necessarily for the quarter. And then I have a follow-up question there.

G. Bradley Cole

Well, Isaac, since it's an approximation, I'll just leave it that way. Could be for the quarter, could be the exit, but it's an approximation, yes. But either way, it's rapid growth.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Sure, sure, fair enough. And then just on the sales force, any way you can break down how many people at this point are discretely focused on prostate, and if I heard you correctly, it sounded like you weren't expecting to have a big ramp there in the back half in terms of headcount, but just want to confirm that.

G. Bradley Cole

Yes, from a field perspective, we have about 30 people who are dedicated to prostate and we're not planning to expand that in the back half of the year.

Operator

[Operator Instructions] Our next question comes from Tycho Peterson with JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Just thinking about the question on OpEx, as we -- as you mentioned before, you'll have a little bit of R&D leverage in the back half of the year and you're not adding additional headcount on sales. So should we think about a little bit more OpEx leverage in the back of this year and then maybe a step-up in R&D next year as release of [ph] liquid biopsy and the sequence initiative?

G. Bradley Cole

I think we do expect to spend more in R&D. Maybe I wasn't as clear as I could have been. We expect to spend more in R&D at the back half of the year. There's a number of things going on in prostate that are going to require that investment and liquid biopsy as well. There'll be continued R&D investment in the back half of the year. And we expect the loss to be similar while we'll see some revenue growth as well. So the investment is still -- there's still going to be full quarter investment in prostate. For example, even in the field team, they weren't all here in Q2 on day 1, for example.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then on the competitive dynamics, you've held share and you've highlighted that. Are you seeing any of your competitors get more aggressive on price, just wondering if out of desperation, they're trying to get a little bit more aggressive.

G. Bradley Cole

Well we haven't seen much change. And I guess, I don't think we have a lot of visibility to price, in particular. We just know that we continue to see when it's time for contract renewal that we're able to see price increases and maintain coverage. So Oncotype is well accepted.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then lastly just on the FDA dynamic. I mean, if we go back to IVDMIA, you guys played a very active role on the 21st century medicine coalition. I mean, can you maybe just talk about your dialogue with FDA currently? Obviously, you have a lot of data and presumably you're going to be grandfathered in and in a good position here, but maybe if you could just talk to the degree to which you've had a dialogue with FDA around the letter that was submitted to Congress and your additional thoughts there.

Kimberly J. Popovits

Yes. I can -- and maybe just to restate what I said before and add a little. We've been in conversations with FDA on and off for 8 years now over this issue. So it's not a new story. It's a continuing story. I think we can say that we've been successful in leading some of the change that's already taken place from the initial guidance we saw 8 years ago to where we are today. We continue to lead stakeholder groups and conversations and we're going to continue to do that going forward, and I would imagine between now and the implementation of whatever ends up getting issued as a final draft, is a conversation that we'll continue to have both as a company but also with the stakeholder groups. One thing to keep in mind, this will be a long process. This is not something that we expect that's going to get sorted out in the next few months. We're looking at probably an extended comment period post- whenever this gets published, which is probably going to be the end of September. That will take us into 2015, and then as you're probably read, there are a number of time frames, 6 months to 12 months, to begin filing and meet the requirement. So there's a lot to work out, but we want to stay fully engaged. We are appreciative of FDA's outreach to work with the stakeholders because they also recognize this is a huge undertaking for them. When you think about there are thousands of CLIA laboratories that do high complexity tests, and clearly, they don't have the resources today to manage this. So we want to work with them to help address the additional issues, and they're substantial. So some of the things that we're going to have to sort through and they know that, I mean, I think we're going to have to work through it together. So I'm anticipating richer and even greater dialogue going forward, but I don't think that there's a fast solution or endpoint to how this unrolls.

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. So during the prepared remarks, you discussed a path -- I guess, a path towards profitability in full year 2016. So can you just talk a bit more in broad strokes regarding the sort of the top line growth that you envision by this time and also just maybe broadly, again, just talking about gross margins and sort of the R&D and SG&A spend that you envision by this time.

G. Bradley Cole

Yes, full year profitability is really led by the reimbursement success, particularly in prostate. As I cited today, in invasive breast cancer market with full reimbursement here in the U.S. and growing reimbursement outside the United States, we have operating income approaching 20%. So you can -- the quick math, back-of-the-envelope math, would say that we're investing pretty heavily in our pipeline programs and in prostate. So it will require reimbursement to be beyond meaningful in '16 and sales growth rates, as a result of that, in the 20% range. So we don't see full year profitability that comes with growth rates in the 10% or 11% range, but with prostate reimbursement, top line is going to accelerate beyond -- back to maybe some earlier historical levels, the 20%, 30% range.

Rafael Tejada - BofA Merrill Lynch, Research Division

Okay. And regarding the penetration levels internationally, you were talking about those still being under 10%, but can you remind us, in which countries you are, I guess, more penetrated and sort of what those levels look like and how long it took to get there? I'm just trying to get a sense of how should we -- how we think about the future penetration opportunity overseas.

G. Bradley Cole

Yes, there's a few, there's a handful that we can cite, but I'll remind you that each country finds its own path and finds its own way to high penetration. So Israel with very few payors, within a couple, 3 years after launch, went above 50% penetration, and today, we believe, is above 80% penetration. Ireland is another place. When reimbursement came on in privates and then public reimbursement followed shortly thereafter, within a couple of years, it's well above 50%. So I think, likewise, in Canada. We just announced today the inclusion of Alberta as another province, where we will now have almost 90% coverage in Canada. And much like in the U.S., when we had 90% coverage, that allowed us to penetrate from the mid-40s to above 60%, and so Canada is on track to be much like the U.S. in the next year or so. So we're still continuing to see growth in these markets, but you might have noticed that you take the populations of those countries and they're, what, 50 million, 60 million. So any one major country in Western Europe would represent everything I just talked to you about. And in those areas we're underpenetrated, but partly because reimbursement has yet to completely break.

Rafael Tejada - BofA Merrill Lynch, Research Division

And then just one quick follow-up on the CPT code that was discussed last quarter for the breast cancer test. Was there -- if I remember correctly, I think there might have been in July just to discuss sort of the reimbursement pathway for this and if so, any updates regarding this code?

Kimberly J. Popovits

Yes, so that meeting went as planned, and we recommended a gap fill approach for the unique code that we received. We're very happy about that. So they will come back with their decision in that regard, probably early fall. There'll be a comment period, a rate would -- we would imagine get set sometime in 2015 to take place in 2016. So assuming a gap fill process, which we fully expect would be the case, we will just go back and have the same conversation we've already had with Palmetto and Noridian around the Oncotype DX process. So good news for us is that we've had those discussions already. When we look at how they have been instructed to do gap fill going forward, it actually -- we should come up with the same price, if not one that's higher, given that if they averaged in private payor rate. So we think we're in good shape there, no surprises, and the process moves forward.

Operator

Our next question comes from Dan Leonard with Leerink Swann.

Unknown Analyst

[indiscernible] for Dan. So just I was looking for an update on your commercial progress in the U.K. and whether that's led to any positive discussions with any other payors in the EU. And then where do you think you are in terms of penetration of covered lives in Western Europe?

G. Bradley Cole

Okay, well, first in the U.K., we are seeing growth in assays there and with 100% of privates covering and with a NICE recommendation, that has a strong influence just in the physician community. We're continuing to see growth there. And part of the strong first half, as a result, we're seeing some NHS hospitals able to order out of their current budgets. The recommendation is now moved away from NICE to an NHS contracting discussion, where we have had before us determining how we're going to proceed with NHS England. Is it a centralized decision around implementation or a decentralized decision? The good news is it appears to be England is going to be centralized single point. In the meantime, we don't think we're going to see the kind of progress that would have any impact in '14, but more likely in '15, when this could be covered as a new funding. Today, they have no funding available in the current year to move on that. What we've been able to do is contract with some of Northern Ireland and the negotiations in Wales. So there's other places where we can contract following the NICE recommendation, but we haven't finalized any arrangements with NHS England at this point.

Kimberly J. Popovits

I think the second part of your question though is, has that decision by NICE had an impact outside of the U.K.? Absolutely, it has. So the tone and tenor of the conversations we're having in other areas have certainly been helped by NICE's recommendation for Oncotype.

Unknown Analyst

Great. And just a quick follow-up, maybe some commentary on the competitive environment and, kind of more pointedly, just given where we are with the penetration rate in the U.S. breast, how much farther do you think the industry can go there?

Kimberly J. Popovits

Well, we certainly think it's above where it is today and we can look to different regions of the country where we see quite a variance. So we actually have territories that are above 90% penetration. So clearly, we don't think we're at the limit. We're very pleased to have seen the increased penetration in the quarter and we believe that we can continue to accelerate that. I think from a competitive standpoint, as well on share, I mean, one of the things that we know is having an impact is we now have multiple studies to include an additional one that really is showing physicians that these tests are not equivalent. And further highlighting that there is only one that's been developed and validated to predict chemotherapy benefit is important. I think when you layer on that, that you're not going to get the same answer when you compare these tests head-to-head has been very, very helpful. So between increasing penetration and being in the strong share position that we are with that additional clinical evidence, we look forward to continued growth on both fronts.

Operator

Our next question comes from Jim Birchenough with BMO Capital Markets.

Nicholas Abbott - BMO Capital Markets Canada

It's Nick in for Jim. Please don't accept this as a glass half-full -- sorry, half-empty comment, but you've got 50% of urologists reordering your test, so 50% aren't. Is it just too early to understand what the barriers are and maybe what lessons did you learn from the breast cancer experience that can be applied to urology to try to ramp up that reordering rate? And I have a follow-on question.

G. Bradley Cole

Just to point out the numbers, when you're early in a ramp, I think Kim referred to this, 30% growth in the number of urologists ordering just in the last 90 days. Well that's 250 physicians who ordered for the first time. They haven't had even -- hardly any of them have had a chance to reorder. So if you look -- if you did a 1-quarter lag, you'd be more like at 70% reorder rate. So I think when the numbers are growing so rapidly, 50% may not sound impressive, but we think it's certainly an indication of interest. But, Steve, do you want to...

Steven Shak

Yes, certainly, when our team is out and visiting the sites, we're still -- this is a new test and with many of the tests actually, we get a chance to go back, talk to them about the use of the test, hear their testimonials and they're out there now having speaker programs and peer training each other about the test and how to use it. And I think it, as was pointed out earlier by one of the other people who asked a question, we clearly are seeing a ramp here that was much greater than the early days that we saw with breast cancer test.

Kimberly J. Popovits

Yes, and I would just add, your comment around what experience from breast are we using here, one of the things that has been hugely impactful were the decision impact studies. I mean, they're really important for payors, but as physicians are using the test, and one thing nice about the urology audience, the patient populations are grouped in these large practices, so being able to do the decision impact work and show them how treatment decisions are changing within their own patient populations is something that we'll stay focused on because it's -- the data is impressive, and it's exactly the type of thing that will encourage them to continue to look for the right patients to put on active surveillance.

Nicholas Abbott - BMO Capital Markets Canada

Okay. And my follow-up question is on the liquid biopsy. Obviously, it's extremely fascinating. I guess, my question is: there are potentially way too many questions that you want to address than you probably have time and resources to address simultaneously. So as you go around the various stakeholders, the payors, the scientists, the physicians and the patients, have you prioritized the list of questions that you want to try and address with liquid biopsy that perhaps, obviously are different than the kinds of questions that are being asked with current tests or algorithms?

Steven Shak

Yes, absolutely. Again, for competitive reasons, I'm not going to be sharing the precise directions that we're going to be headed. But clearly here, just as in our early efforts in 2002 and 2003 on the breast cancer tests, being able to identify those situations where this is going to give information that's critical and practice-changing, as opposed to just interesting or useful, is going to be the direction where we're going to head. And we're real excited about that. As you know, we have over 200 patients now enrolled in our first study with many sites very actively participating with us. So we're looking to move this as quickly as we can.

Operator

We will now conclude the Q&A portion of the call. At this time, I'd like to turn the call back over to Kim Popovits.

Kimberly J. Popovits

Thank you and thanks for joining us today and always for your interest in Genomic Health. We'll look forward to seeing many of you at some upcoming meetings. Take care.

Operator

And this concludes today's second quarter 2014 conference call for Genomic Health. You may now disconnect.

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Genomic Health (NASDAQ:GHDX): Q2 EPS of -$0.15 beats by $0.10. Revenue of $70.47M (+10.6% Y/Y) beats by $1.43M.