Genomic Health Q3 2007 Earnings Call Transcript

| About: Genomic Health, (GHDX)

Genomic Health Inc (NASDAQ:GHDX)

Q3 2007 Earnings Call

October 30, 2007 4:30 pm ET

Executives

Randy Scott - Chairman and CEO

Brad Cole, EVP and CFO

Kim Popovits - President and COO

Joffre Baker - Chief Scientific Officer

Steve Shak - Chief Medical Officer

Analysts

Charles Duncan - JMPSecurities

Bruce Jackson - RBC Capital Markets

Agene Timbale - Lehman Brothers

DavisPetersen - JP Morgan

Eric Chriscuolo - Thomas Weisel Partners

Verne Passim - Citadel Investment Group

Dave Clair - Piper Jaffray

George Zavoico -- Cantor Fitzgerald.

Operator

Good afternoon. Myname is Amy, and I will be your conference operator today. At this time I wouldlike to welcome everyone to the Third Quarter Genomic Health Conference Call.All lines have been placed on mute to prevent any background noise. After thespeaker's remark, there will be a question-and-answer session. (OperatorInstructions). Thank you, Mr. Brad Cole you may begin your conference.

Brad Cole

Thank you. Good afternoon, everyone and welcome to GenomicHealth's Third Quarter 2007 Conference Call. Before we begin, I would like toremind you that various remarks that we make on this call that are nothistorical including those about our future financial and operating results,future plans and prospects, the impact of technological advances on ourbusiness, the success of our business strategy, future publications andpresentations, the impact of clinical data on demand, enhancement stock ofGHDX, economic benefits and value to payers, of our tests, market trends,growth opportunities, our product pipelines, our competitive position, demandfor our tests and drivers of demand, payer coverage and progress in patientaccess, our investment in our product pipeline and commercial organization, clinicaloutcomes and timing of clinical studies, our growth potential and ourexpectations regarding our ability to comply with potential FDA regulation,constitute forward-looking statements within the meaning of the Safe Harborprovisions of the Private Securities Litigation Reform Act.

We refer you to our quarterly report on Form 10-Q for thequarter ended June 30, 2007 filed with the SEC, in particular to the sectionentitled "Risks Factors" for additional information on factors thatcould cause actual results to differ materially from our current expectations.These forward-looking statements speak only as of the date thereof and wedisclaim any obligations to update these forward-looking statements.

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

Randy Scott

Thanks Brad. Good afternoon everyone and welcome. Joining ustoday are Kim Popovits, our President; Joffre Baker, our Chief ScientificOfficer and by phone Steve Shak, our Chief Medical Officer.

We once again saw record revenue in the third quarter,fueled by our progress with physicians, patients and payers. We are especiallypleased to report that the American Society of Clinical Oncology or ASCO, lastweek announced updated clinical practice guidelines on the use of tumor markersin breast cancer that recommend the use of Oncotype DX in breast cancertreatment planning.

ASCO's clinical practice guidelines serve as a guide fordoctors by outlining appropriate methods of treatment and care. Because guidelineshave historically had a significant impact on clinical practice, we believethis event marks another significant step forward for the role of VitroDiagnostics in personalizing cancer treatment.

Inclusion of Oncotype DX and ASCO's revised guidelinesprovide physicians, patients and payers, further independent evidence of theclinical utility and economic value of Oncotype DX. We believe that the newpractice guidelines, combined with our clinical progress, increasing adoption,and growing reimbursement, indicate that use of Oncotype DX is becomingstandard practice in breast cancer treatment planning. We are pleased to reviewwith you today our advances in each of these areas, as well as the significantstrides we made in research and development.

I will turn the call over to Kim Popovits to discuss ourcommercial and reimbursement progress followed by Brad Cole, who will reviewour third quarter financial results. I will return with some additional remarksbefore closing after addressing any questions you may have in the Q&A. Kim?

Kim Popovits

Thanks Randy. Our continued progress with adoption andreimbursement was evident this part quarter, and supports the people, andsystems we are putting in place to address increasing demand for Oncotype DX.

We are pleased to report a strong year-over-year increase ofgreater than 55% in test delivered. More than 5,950 tests were delivered in thequarter, compared to more than 3,800 in the third quarter of 2006.

It is also significant to note that since our last launch inearly 2004, more than 6,600 physicians have utilized Oncotype DX in treatmentplanning, and that more than 39,000 patients have benefited from theinformation provided by our assay.

Patients that access Oncotype DX continued to increase in thequarter, as we gained positive covers decisions from both national and regionalplayers. Today more than half of all U.S. insured life are covered forOncotype DX. We believe this significant accomplishment further demonstratesthe growing support for the value of Oncotype DX brand to clinical practice andtreatment decision making.

This quarter, we secured a contract of CareFirst, Blue Cross,Blue Shield, for 3.2 million lives and Blue Cross, Blue Shield of Arizonaestablished a new coverage policy covering approximately one million lives.

Further WellPoint, Incorporated a leading U.S. health benefits provideradapted a policy that covers Oncotype DX, with certain restrictions. We areworking with WellPoint to obtain extended coverage for all patients under theplan and will continue to seek reimbursement on behalf of patients outside thispolicy, on an individual basis, as we have successfully done in the past.

We believe that the newly published ASCO's guidelines are acompelling, independent review of the clinical utility of Oncotype DX that willprovide further simulation for all payers to consider adopting or expandingcoverage policy.

In addition to the progress we have made with payers, thecommercial organization is developing innovative programs to increase the valueof our service by reducing barriers to access, and by supporting educationalresources for physicians and patients. We have increased our direct to patientefforts, and encourage you to visit our newly launched website for patients;MyTreatmentDecision.com.

We also successfully launched a new streamline orderingprocess late in the quarter. Also late in the quarter we began to see theimpact of the sales representatives we hired earlier this year. With theseelements in place and with the updated ASCO guidelines in hand, we expect todrive continued adoption and reimbursement progress through the end of theyear.

With that, I’ll turn it over to Brad to review in moredetail our third quarter financial results.

Brad Cole

Thanks Kim. We’re again pleased with our financial resultsfor the third quarter of 2007. For the first time this year, our operatingloss, net loss and loss per share all decreased, when compared to the sameperiod in 2006. Our third quarter revenue was $15.9 million, more than doublethe $7.1 million in revenue for the third quarter of 2006.

Product revenue from Oncotype DX in the third quarter of2007 was $15.8 million, greater than 125% increase, compared to $6.9 millionfor the same period in 2006, and reflects test volume from increased adoptionand importantly improved conversion of billings into revenue, as a result ofcontinued progress in reimbursement.

Product revenue on accrual basis was 31% of total productrevenue, or $4.8 million compared to $3.2 million in the third quarter of 2006,when it was 47% of product revenue.

Cost of product revenue was $4.4 million in the thirdquarter of 2007 as compared to $2.7 million in the third quarter of 2006. Ourgross margin of our product revenue for the third quarter was again greaterthan 70%, as it has been throughout the year. The gross margin was 72% in thethird quarter of 2007, compared to 61% in the third quarter of last year.

Other operating expenses increased $5.5 million in the thirdquarter versus a year ago, reflecting our continued investment in our productpipeline, both in breast cancer and in other cancers, as well as our investmentin our commercial organization.

The increase in total operating expenses included FAS 123Rstock-based compensation expense of $1.6 million compared to $0.8 million forthe third quarter of last year. The company recorded a net loss of $7.3 millionin the third quarter of 2007, compared to a net loss of $8.2 million in thethird quarter of 2006.

Year-to-date revenue in 2007 of $44.7 million compares to$20.6 million in the first nine months of 2006. The net loss for the first ninemonths of 2007 was $21.3 million compared to $19.9 million last year as weinvested the increased revenue back into our development and commercialexpansion programs. Excluding FAS 123R expenses, the year-to-date lossdecreased in 2007 compared to 2006.

Cash and cash equivalent and investments at September 30th,2007 were $73.9 million compared to $44.2 million at December 31st, 2006. TheSeptember 2007 balance reflects $50 million raise in our follow-on offeringcompleted in May of this year and approximately $20 million of cash usedyear-to-date to fund operations and capital investments.

I will now turn the call back over to Randy for a fewadditional comments.

Randy Scott

Thanks, Brad. Our continued success with adoption in[reimbursement] revenue enables us to invest in the [form of] personalizedmedicine, and our pipeline of opportunities. Earlier this month, we announcedencouraging results from the study Oncotype DX in postmenopausal women with node-positive, hormone receptor positive breastcancer conducted by the Southwest Oncology Group or SWOG, a National CancerInstitute clinical trials cooperative group.

For this study,researchers analyzed tumor samples from patients in the SWOG/Breast CancerIntergroup of North America trial that evaluated postmenopausal women who weretreated with chemohormonal therapy followed by tamoxifen versus treatment withtamoxifen alone.

Benefit of theaddition of chemotherapy was observed in patients with high Oncotype DXRecurrence Scores. However, chemotherapy did not appear to benefit patientswith low Oncotype DX Recurrence Scores, despite the presence of positive nodes.We are pleased that results suggest that Oncotype DX may be useful inpredicting survival without recurrence and the benefit of chemotherapy fornode-positive breast cancer patients.

We along with SWOGwill submit these data for presentation at the San Antonio Breast Cancer Symposiumin December. In addition, multiple abstracts regarding Oncotype DX havebeen accepted for San Antonio,including two posters and one oral presentation offered by company researchersand collaborators. These abstracts include presentations on single genereporting, a quantitative estrogen and progesterone receptor expression withOncotype DX and a comparison between Oncotype DX and [estrogen] online.

We expect to launch single gene reporting for quantitativeestrogen and progesterone receptor gene expression as enhancement to current Oncotype DX reports early next year.

We believe thatthese individual genes scores in addition to the Recurrence Score may provide additional valuable informationfor treatment planning. We see single gene reporting as an opportunity tofurther increase the clinical value of Oncotype DX and strengthen our positionas a leader in the field.

Finally, ourclinical program to develop the colon cancer test continues to advance.We expect that our progress will lead to a clinical validation study in 2008.

In closing, the last several months have marked severalimportant milestones for Genomic Health, each of which gives us confidence inour business model and long-term prospects to provide patients and theirdoctors with valuable information to help them determine the best course oftreatment for the individual cancer. With greater than 50% of those insured inthe U.S.not covered by agreements, contracts or policies for reimbursement of Oncotype DX and with the inclusion of OncotypeDX and ASCO guidelines, we look forward to having a continued impact upontreatment outcomes and improving patient care.

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

Question-and-AnswerSession

Operator

(Operator Instructions)Your first question comes from the Charles Duncan with JMP Securities.

Charles Duncan - JMP Securities

Hi, good afternoon,folks and congratulations on a good quarter and the recent ASCO guidelines.

Randy Scott

Thanks, Charles.

Charles Duncan - JMP Securities

I had a questionregarding kind of the sequential growth, the trends in the business right now.If we calculated, test bills are up approximately 3% sequentially, it's downfrom a 5.5% growth sequentially 1Q to 2Q. Can you help us understand thecurrent tone of business and how much of an impact seasonality may haveon that business?

Randy Scott

Yes sure Charles, thanks and in fact we believe that most ofthat impact is seasonality as we have cited over the last several years, we expectto see some seasonality close around the spring break in Q2 when a lot ofpeople take vacation and especially in the summer months, late July and August.So given that we expect to see seasonality, we weren't surprised by what we sawin terms of growth quarter-over-quarter. The growth year-over-year has beenquite strong. Preferably that's also because the little bit of visibility showsthat as people were headed back from vacations in early September, we saw avery strong uptick in test ordered and delivered up late in the quarter as youwould expect would be a seasonal effect giving us good momentum moving into thefourth quarter.

So, we were very comfortable with being right on target fora 23,000 to 25,000 tests this year and feel pretty comfortable that what you'relooking there is seasonality. You may also remember that a year ago, while wehad some pretty big news in Q2 of 2006, when we published both firstchemotherapy benefit study, as well as the Kaiser test study and so those hadsome impact on last year's numbers. So as we look forward, I think we’llcontinue to see strong growth, but a good portion of growth is likely to comein Q4 and Q1 and I would expect again next year that we'll see some seasonalityin Q3, in Q2.

Charles Duncan - JMP Securities

Okay, that makes sense to me. And then if I may ask aquestion on ASCO, it’s more of a conceptual question, perhaps to Kim or whoevercan answer it. Can you give me some sense as to the number of early adapterversus late adapters and the impact that the ASCO guidelines may have on thekind of usage pattern for those different physician communities?

Kimberly Popovits

Sure. I think it's an important to knowthe statistics again, that 6,600 physicians have now used the assay, and whatwe really focusing on Charles, is getting them to use this more often.

The market research shown that werecently -- actually it's a third-party research would show you that right nowover 90% of oncologists actually are aware of Oncotype DX. And thenumber one barrier to usage remains reimbursement. So we really think thatthese ASCO guidelines are going to help a lot with moving this towards the endof the tier and they are helping payers to adopt or to expand policies thatexist right now.

So the usage base will continue to expand, our real focuswill be on the penetration with the existing customer base, and we expect thatbetween the streamline ordering, the new data that folks are going to see atASCO, and some of that has already been presented along with the new reps thatwe have, we'll definitely see a difference in the fourth quarter.

Charles Duncan - JMP Securities

That makes sense to me. I know it's difficult to estimate.But we've been out talking with some docs. What is kind of the averagepercentage penetration within a practice that you're seeing versus obviously,you're getting very broad penetration with, for the one or two, but any senseas to that number?

Kimberly Popovits

Yeah. It's interesting about the numbers?They're actually smaller than what people may think. If you think about thetotal population of about 80,000 patients spread across 6,000 to 7,000customers, an average physiciancould only potentially see one patient a quarter that falls into the categoryof, no negative or be a positive for the assay.

Now that doesn't mean there are all at the average, but wethink giving a practice or a physician in the neighborhood of three to fivepatients a quarter is about right, so you can imagine that are working isspread across the base of 6,000 plus.

Again why we need to develop in smaller territories, if theycould spend more time with customers. But I will also go back to understandingthat main barrier is reimbursement and as we are now seeing that barrierlifted, both with news from WellPoint, Blue Cross Blue Shield test that youheard last quarter, we are making a lot of progress there, so we think that'sgoing to have a positive effect.

Charles Duncan - JMP Securities

Super. Thanks for the added color. I will jump back in thequeue.

Operator

Your next question comes from Bruce Jackson with RBC CapitalMarkets.

Bruce Jackson - RBCCapital Markets

Hi good afternoon.

Kimberly Popovits

Hi, Bruce.

Bruce Jackson - RBCCapital Markets

You mentioned in a press release that you guys earmarked foryour tests, so I was wondering if you had any international revenue in thequarter.

Randy Scott

Yes. We don't break out the international revenue separatelyfrom U.S. revenue and socertainly the bulk of our revenue is U.S.,but we are continually expanding and thinking about our presenceinternationally, but the bulk of our efforts would be in the U.S. over the next year. We arebeginning to expand there. We have partnerships in the U.K. and Israeland in Japan.So Kim, do you want to say anything else about, just our international businessand plans over the next year or two?

Kim Popovits

Well, as we have done, I would say nearly cleared some ofthe hurdles we've been talking to you about in the U.S. So and we've been waiting toget this reimbursement straight away and now we are talking over 50% of thepatient's coverage. We do think its time to move on and be a little bit moreproactive than the ex-U.S. markets, so we have established some partnerships inother countries and we are looking to expand more proactively just next yearwill be focus for 2008.

Randy Scott

With regard to the international market it's a long-termproject though. In many ways it will be almost starting over from where we arein the U.S.,in terms of getting in and working with clinicians, doing additional clinicalstudies and programs. So we that as a great, but long-term opportunity.

Bruce Jackson - RBCCapital Markets

Okay. And then in terms of the sales and marketing effort,have you added any salespeople this quarter from last quarter?

Kim Popovits

We did not. And the rest of it I spoke of in terms of notseeing the impact of their work. We brought a group on early summer and trainedthem in the late June, July timeframe. It generally takes about three months orso for reps to get up and running and really where we start to see an impact oftheir work, and that's why, as Randy, I think mentioned earlier as we left tothe quarter we're beginning to see the impact of those kind of additional reps,so we have not added more past that.

Bruce Jackson - RBCCapital Markets

Okay, that some 60 in total right?

Kim Popovits

60 in total and I would, might add that commercialorganization now is actually double that. So when you look at the 60 reps, plusmanaged care, the reimbursement group, and all of that we've got about 120folks up there right now working to provide access to patients.

Bruce Jackson - RBCCapital Markets

Okay. And then can you give us a little bit of color on thepayer or mix for the quarter?

Randy Scott

Brad?

Brad Cole

Sure, if by that Bruce, you mean how much came fromgovernment versus private? Medicare continues to run about just under 20% ofour volume that represents a little bit higher percentage of our total revenuebecause they are regular contracted accrual payer. We have seen the effect ofcontracts. Revenue grew nicely, sequentially this quarter and qualitative[standards] was too narrow matter with big payers and we are seeing themcontributing more to revenue growth.

Bruce Jackson - RBCCapital Markets

Okay. And then how is the price increase working right now?I think you had increased prices last quarter. Where does the price stand now?

Randy Scott

On June 1st, we took a price increase for the $3650, sowe've not seen that anything but positive effects on our business overall. So,we are confident that with ASCO guidelines in place and with all the commentsthat we have, our business is strong and growing, so we are very comfortablewith where we are right now with the price and structures.

Kim Popovits

Okay. And maybe just to add, the price increase did notaffect payers who we already had contracts with at that point.

Bruce Jackson - RBCCapital Markets

Okay. Thank you very much.

Randy Scott

Welcome.

Operator

The next question comes from [Agene Timbale] with LehmanBrothers.

Agene Timbale -Lehman Brothers

Hi guys. I wanted to the explore that the node-positiveopportunity. So, in looking at node-positive or among receptor positive breastcancer, can you remind us what portion of those patients currently receivechemo and what the current decision making criteria for physicians and patientsand how do you see Oncotype DX fitting into that?

Randy Scott

Sure. I can give just a brief time. If you look at the totalmarket for node-negative in your positive breast cancer, it’s about a 120,000of patients of which we think that's about 80,000 patients addressable to ourmarkets, somewhere between 70,000 to 80,000. With regarding node-positive,there's about 70,000 node-positive ER-positive breast cancer patients withinthe affluent markets.

We are not giving any guidance right now in terms of what wethink might be the addressable submarket. We'll wait till that has beenproperly presented at meetings. So, we look at the node-positive submarket asan opportunity. But certainly we realize that most patients who arenode-positive are likely to be treated with chemotherapy, because it'snode-positive, physicians are likely to be more aggressive than they would bein the node-negative in that case. So we will be updating for the future withregards to what we think the addressable market will be there and what patientsmight be appropriate or not.

Agene Timbale -Lehman Brothers

And then just to discuss the colon cancer program. Can youremind us was I guess, what your planned or I guess clinical validation study.What that might look like? A little more clarity on timelines there? And thenalso is that something you're designing in concert with the FDA?

Randy Scott

Well, we're currently not commenting on any plans withregard to FDA. We certainly have, and will continue to have, ongoing dialoguesalso with FDA, but we won't be commenting anything in terms of lots or plans.We look forward to the next steps in terms of the current draft guidance.

With regard to colon program, as we'd indicated, the planwas to be in position to do a validation study in 2008. We're on target to dothat, so we've conducted four clinical studies that we've used for discoveryprocess and we're now in the process of working towards a validation study,which would happen next year.

So Steve, do you want to further on the colon program?

Steve Shak

I think the main thing to say is that wewere able to report the results of two of the studies about it at our priorASCO, and that the additional two studies we did to identify the genes to takeforward for clinical validation have certainly led us to increase the resourcesand accelerate the work that we are doing to get us to that validation study nextyear.

Agene Timbale -Lehman Brothers

Is that something we could still expectto possibly still in the market in 2009?

Randy Scott

Yeah. 2009 is a reasonable target, but I will throw out the caveat that we're in a somewhat in anuncertain regulatory situation right now. So some of that may depend on finalFDA draft guidance and what regulatory path that we would have to take. So2009, we're on target for that, but we'll have to see what regulatory feedbackwe'll get over the coming year as well.

Agene Timbale -Lehman Brothers

Thanks for taking the question.

Operator

Your next question is from [Davis Petersen] with JP Morgan.

Davis Petersen - JP Morgan

Hi, guys. Thanks for taking my call. First question; Iguess, Kim, I am wondering and this may be just even two broad a question. Butcan you may be talk a little bit about the decision making process that happensfollowing this from a physician standpoint, following the ASCO guidelines andis this something that sales force has seen a immediate uptake from, were therea good amount of potential customers out there that were waiting for somethinglike this to tip the scales?

Kim Popovits

Yeah. In general, what we can say is that and I think we'redelighted with, as the guidelines really represent an independent evidencebased review of all of the tests in this category and absolutely has supportedOncotype DX as the test that has met that clinical validation hurdles. So do wethink that, that will have an impact on physicians and payers? Yes, we do, overtime. It would be difficult to say that in 24 hours, we are going toautomatically see major things happen, but we do know that ASCO guidelines havehistorically influenced this community has approached to treating patients fromthe, our practice guidelines.

We have had a number of payers over the past year. Sosuggested that they are waiting to see standard practice guidelines before theymake decisions. So we will be back talking with them. And in some cases we willbe back talking with payers regarding expanding there current, our coveragepolicies due to these guidelines. So, yeah, we do think that it will have animpact and yes, we have announced in the past whether or not any of the,whether Oncotype DX was put into practice guidelines.

Davis Petersen - JP Morgan

Okay, great. Thanks. And then on the WellPoint signing; doyou know how big that could be if you were to work due to restrictions from acovered life standpoint?

Randy Scott

That's difficult to say. WellPoint put a number of restrictionson it and a couple of weeks of that. So the ASCO guidelines came into play. So,WellPoint in total covers about 34 million lives, and we think this a stepforward in the right direction and we'll be working with them, especially nowwith the guidelines in place and try to move them towards coverage of all theirpatients that would fit the guideline criteria.

Davis Petersen - JP Morgan

Okay, great and Brad just a quick question, I think I missedit. Did you give the percent of revenues accrual in the beginning?

Brad Cole

Yes I did, in the quarter it was 31% of total revenue, totalproduct revenue about $4.8 million. That compares to $3.2 million a year ago.Now, a year ago it was 47% of revenue, but revenue has grown so much and themajority of the revenue this quarter is coming from cash payers.

Davis Petersen - JP Morgan

Okay, great. Thanks for taking the question.

Brad Cole

Yes.

Operator

Your next question is from [Eric Chriscuolo] with ThomasWeisel Partners.

Eric Chriscuolo -Thomas Weisel Partners

Hi, good afternoon. I am filling in for Peter Lawson.

Brad Cole

Hi, Eric.

Eric Chriscuolo -Thomas Weisel Partners

I'm just wondering and I apologize if you done over thispreviously. Is there any expectation right now when that node-positiveindication, if you start to be marketing that?

Randy Scott

We are not giving out any information with regard to futuremarketing plans. That'll be inappropriate for us to do. The next step is reallyfor the data to be first presented and we with our partners at the SouthwestOncology Group and collaborators will take the lead on that. So we will awaitpresentation of the data before we make any comment with regard to our futurecommercial plans.

Eric Chriscuolo -Thomas Weisel Partners

Okay. And just one more question. As far as thereimbursement goals or any contracts that you have about now on the sort of atrial basis, where they did pay or might not try the test for threemonths and see, do an economic analysis and than get back to you for an extendedcoverage or are they pretty much just typical coverage contracts?

Kim Popovits

Certainly typical coverage contracts and we do have a numberof payers that we are working with, actually at our request, as well to trackthe impact that the contracts are having on treatment decisions. But there issome apart, I think a bit more informal study is going on in that regard butnot dependent on how the contract is set up.

Eric Chriscuolo -Thomas Weisel Partners

Okay, great thank you very much.

Operator

(Operator Instructions) Your next question comes from [VernePassim] with Citadel Investment Group.

Verne Passim -Citadel Investment Group

Hi guys, how are you doing?

Randy Scott

Very good.

Verne Passim -Citadel Investment Group

Great. You might have answered this question. But can we seethe back lash from the FDA concerning 510 approval in the future. And will thathave; is there any current possible effects on the Oncotype DX testingpresently?

Randy Scott

Well it's hard to measure exactly what’s happening in themarket, but we've seen our market adoption and penetration as they continue togrow on a pretty steady basis, even given the regulatory guidelines structurethat is out there currently. So, we think that good science is good science andthe market first and foremost looks to the science behind the technologies andbehind the assays that are on the market and that adoption and reimbursement is-- in some places vary. It takes a lot of effort, a lot of good science, logic,clinical publications and with ASCO guidelines we are really pleased to see thelevel of acceptance of the science of our test for Oncotype DX. So we willcontinue to work with regulatory authorities around the current [test times]and how that goes forward. But we believe overall in the market place thatphysicians and payers are predominantly focused on the science of the test andnot necessarily the regulatory issues, per se.

Verne Passim -Citadel Investment Group

Okay, because I heard like other companies, there is acompany out there called Clinical Data that does similar type of things as youguys. Only there are I guess more in niche markets that hasn't mentionedanything at all about the FDA, and I was kind of wondering, what was thedifference between both companies on that same, you know…?

Randy Scott

Remember that the current FDA guidelines actually are onlyeffective for what was called IVDMIA, that is in vitro diagnostic multivariateindex assays, and so that's a special process assays that involve the combinationof multiple gene or data points that are indexed into a score such as ourRecurrence Score.

So that market as the FDA has expressed interest in isactually a subset of a total laboratory development testing markets, so it'squite possible that other companies, they don't fall within thatclassification.

Verne Passim -Citadel Investment Group

Okay. And last a follow-up. Do you guys have any plans to gooutside of cancer and do other niche-type markets for testing?

Randy Scott

We are a company today, we're 100% invested in cancer, and Ithink that gives us just a tremendous advantage over many of the marketplayers. With think this is an exciting opportunity where the cost of cancercare has been skyrocketing over the last decade, and there's just tremendousopportunity to improve the quality of care and bring about healthcare costsavings.

So we certainly may look at markets outside of cancer in thefuture, but today we're 100% focused on what we think is a great opportunity.

Verne Passim - CitadelInvestment Group

Okay. I appreciate it, guys. Thank you very much.

Kim Popovits

Welcome.

Operator

Your next question is from Bill Quirk with Piper Jaffray.

DaveClair - Piper Jaffray

Hi, congratulations. It's Dave Clair herefor Bill. How are you guys doing?

Randy Scott

Good.

DaveClair - Piper Jaffray

Good. Most of my questions have been answered. Just back tothe sales force, you mentioned you have 60 right now, do you think that that'san adequate level for full domestic coverage or you are going to built that outin the future?

Kim Popovits

Yeah. Right now, we think 60 is a good number and we arecontinuing to see opportunity for greater penetration with the existingcustomer base. Feedbacks from our field force tells us that they think theterritories are pretty much right sized right now, but we will look at it andwe've all along have taken a team from them and the market research that we aredoing. But then we think we are going to fix people for while here.

DaveClair - Piper Jaffray

Okay. And then you mentioned that some payers were actuallywaiting for inclusion in the ASCO guidelines. I was just curious if you had achance to follow-up with them and any kind of comments there how the news wasreceived?

Kim Popovits

Yeah. Well you can imagine our managed care team were quiteexcited about the news and I can assure you if they've not been in there yet,they are probably going to be there next week. So, we do again think it was agreat news for personalized medicine and certainly for breast cancer patientsthat Oncotype DX made the guidelines and we hope that it will have impact inthose settings.

I think as somebody mentioned earlier both the physiciansand payers, they do have late adopters and they tend to wait towards for whenthings move a little bit more towards standard of care and clearly theseguidelines suggest that Oncotype DX is moving there and we will certainlyleverage them to get access to patients.

DaveClair - Piper Jaffray

So when do you think that you are going to see a measurableimpact from inclusion in the guidelines?

Kim Popovits

Yeah. I would say, again, I don't think this is somethingyou'll see that its necessarily overnight, but I think over the next three tosix months or so we ought to be able to see some impacts from these guidelinesand we'll look forward to reporting those at the end of the year or early nextyear.

DaveClair - Piper Jaffray

Okay. Thanks a lot.

Kim Popovits

And you are welcome.

Operator

Your next question is from George Zavoico with CantorFitzgerald. George your line is open.

George Zavoico --Cantor Fitzgerald.

Hello

Kim Popovits

Hi.

Kim Popovits

Hey George.

George Zavoico --Cantor Fitzgerald.

Hi. Is that something or somebody has interrupted?

Kim Popovits

No, we didn’t hear anything from you.

Randy Scott

Actually we can hear you fine now George.

George Zavoico --Cantor Fitzgerald.

Okay. I guess that was the moderator. Yes, I actually have areally quick question, first on the couple of; I want to address something thatCharles brought up earlier. What's your total test capacity now?

Randy Scott

Brad you want to…?

Brad Cole

Our capacity in the lab is about 9000 per quarter.

George Zavoico --Cantor Fitzgerald.

And do you have any plan to expand on that in 2008?

Brad Cole

We will, we will.

Randy Scott

There are plans in general to continue to scale lab staffssuite, but they are ahead of the demand cure obviously.

George Zavoico --Cantor Fitzgerald.

Okay, and now getting back to what Charles brought up in hisfirst question, I am a little confused about this disconnect between the testdelivered to the total physician, they seem to be growing the test delivered alittle bit less vigorously than the total physicians that are using the test.There seem to be pattern. Looking back on the quarters the number of testsdelivered seems to parallel fairly closely to total physicians. But this lastquarter was a bit of bigger difference there and compared to 2006, you actuallygrew the test delivered relative to the Q3 than you did, than in 2007. Is theimpact on seasonality for some reason a little bit harder or more impactfulthis year or what would your attribute that disconnect there?

Randy Scott

I don’t think we've really established a full pattern forthe seasonality, if you look at obviously this option has been growing and inthe last couple of years our penetration rates were quite small. So they wereusually impacted by even modest changes. So for example we announced thepublication of the B-20 chemotherapy benefit study and the Kaiser study lastMay that probably had a pretty significant impact on Q3 last year because theyhave that big spike of new on half of still very early penetration rates. Nowpenetration rates are growing more into more into the over 30% of theaddressable market.

So, I think we are just now starting to see and probably nowand over the next year or two, we’ll start to flush out what seasonality reallyis going to look like on an annual go forward basis. So, no we wouldn't put toomuch into sort of looking at this Q3 this year versus a year ago, and we'veseen a substantial pick up in the call. So, if seasonality would havemaintained on in the September after people were back in schools and so forth Ithink we might share your concerns, but the fact this had very nice uplift. Sojust looking at the data, we are very comfortable that we are right on targetfor continued growth.

George Zavoico --Cantor Fitzgerald.

Okay. I think when you mentioned this that the number of thetotal physicians you like to reach is about 7000 in the U.S. Is that true? Is that theactual number?

Kim Popovits

George we figure roughly about 6000 of -- ASCO wouldprobably we'd put 10,000 Oncologists and we look at the ones that were breastcancer specialty not hematology were about 6000 there and then you can add tothat another 1200 to 1500 breast cancer sorts and so that's the market that weare really focused on. So as you can see we are getting pretty close topenetration in terms of numbers of the physicians. The that work that we needto do going forward is getting them to treat more patients and we believe thatwith these guidelines and payer adoption increasing but we are going to be ableto do that because when you talk to positions the number one barriers of newbusiness has been reimbursement.

George Zavoico - Cantor Fitzgerald

Okay. And then you added rep for help in bringing OncotypeDX, I guess in front in these doctors will be more frequently to make themthink about it some more.

Kim Popovits

Yeah. You know, typically when you do market research, oneof the things you look at is, how often are your customers seeing your reps,and one of the things that we learned through last year was not enough becauseit's a complex environment that we're working in and trying to coordinatebetween the physicians, payers, and patients.

On another high service component to Oncotype DX, where wereally did need to get the territories a little smaller, so reps could be infront of the customers more often, and that was our goal in bringing a turn onin the summer. And we're now seeing an impact from them. As Randy mentionedwe've seen nice growth at the end of the third quarter and into Q4.

George Zavoico - Cantor Fitzgerald

Okay. Are you seeing any impact at all of the Celera andmaybe [RdxA]?

Randy Scott

You know, we don't really comment about other folk's effort,we've not seen no significant impact if your market as continuing to growoverall. So we haven't seen any real impact. But yes, we think this is a greatspace and it's obviously going to draw competition. So we expect this to be ahighly competitive build over the years, which is precisely why we continue toinvest so heavily in clinical research and development.

And are now on our seventh major validation study with aromataseinhibitor study that's ongoing right now, of which only three of those studieshave been published today. So we have a lot of data yet to publish moving intothe future, and now with ASCO guidelines, we think we're really in a verystrong position vis-à-vis the competition to be the leader in this space forsome extended period of time.

George Zavoico - Cantor Fitzgerald

Could Steve tune me on that?

Steve Shak

Yeah, George, this is Steve. I think the other thing thatwas notable in the ASCO guidelines is I think they took a major step ineducating the community that not all these tests are equal. Clearly we are verypleased with the strong recommendation for Oncotype DX and clearly it was basedon the clinical evidence and the published data especially with regard toOncotype DX and chemotherapy benefit, but it really does allow selectingpatients for whom a key treatment decision needs to be made.

George Zavoico - Cantor Fitzgerald

Yeah. The guidelines were definitely far more in favor ofOncotype DX than your competitor. But as of the same token they also noted thatOncotype DX was relevant to patients who were treated with tamoxifen rather aromataseinhibitors and you alluded to that was aromatase studies to try and I guesskeep ahead of that curve. Could you describe a little bit more about the impactthat might have?

Randy Scott

Yeah. Well, first let me just say that we really think ofOncotype DX as really a platform not just a product. It has a business modelbecause we plan to continue to expand it and improve the clinical data insupport of Oncotype DX. But may be I can turn it back over to Steve to talkspecifically about what we are doing in aromatase inhibitor area.

Steve Shak

Yeah. Although, right now, certainly, Oncotype DX isfrequently used when either tamoxifen or an aromatase inhibitor is planned. Itscertainly is going to be great interest for us to specifically get data withregard to an aromatase inhibitor study and so that study, we've announced thatwe are now in and we are doing that and are very excited about seeing thoseresults next year.

George Zavoico - Cantor Fitzgerald

Okay. Next year early or in is that towards San Antonio?

Steve Shak

We are going update soon on that one George.

George Zavoico - Cantor Fitzgerald

Okay. All right. Thank you very much.

Randy Scott

Thanks George.

Your next question is from Bruce Cranna with Leerink Swann.

Carlo Wong - LeerinkSwann

Hi, good afternoon everyone. This is [Carlo Wong] for Bruce.

Randy Scott

Hi, Carlo.

Carlo Wong - LeerinkSwann

Hey, how is it going?

Randy Scott

Good.

Carlo Wong - LeerinkSwann

I have a couple of question and please forgive us of you'vealready answered them but we are wondering what exactly is the accrual testingvolume on a quarterly basis? I think you mentioned what the accrual revenueyield is on a quarterly basis 31%, what is that on a test volume basis?

Randy Scott

It's between 22% and 25% and it varies little bit.

Carlo Wong - LeerinkSwann

Okay in ASPs, have you seen any change in ASPs since youincreased your price?

Brad Cole

No, we really haven't. Many contracts will be renegotiatedin polices today, will work at the new price but all of as I said earlier,prices under the old pricing scheme will continue and so this will take quite awhile to build into the system.

Carlo Wong - LeerinkSwann

And can you maybe comment on the blended ASP that you areseeing now in the market?

Brad Cole

Are you looking for what we were contracting and we'reactually getting paid on fields basis because they are really kind of twodifferent worlds.

Carlo Wong - LeerinkSwann

Yeah, that sort of how we are modeling one blended number.

Brad Cole

Okay, well on contracts we've -- its very small discounts,off our list price and most of our contracts were also $3460 and we juststarting now to see contracts offer $3650. On fully adjudicated claims that aredon't have a contract when they go to through the fulfill process, its around$3000.

Carlo Wong - LeerinkSwann

Okay.

Brad Cole

So if you are modeling it in the order of something between3000 and 3300.

Carlo Wong - LeerinkSwann

Okay. That is actually very helpful. And as far as '07guidance is concerned are you maintaining your guidance or you bringing it up?I didn’t see it in the press release?

Randy Scott

We are still entering the guidance that we gave back inFebruary this year. The only adjustment to that guidance we have given as wethink revenue will be near the top end of that guidance and we still hold tothat.

Carlo Wong - LeerinkSwann

Okay, wonderful and that's it from my end. Thanks againguys.

Randy Scott

All right.

Kim Popovits

You're welcome.

Carlo Wong - LeerinkSwann

Take care.

Operator

And there are no further questions at this time. Do you haveany closing remarks?

Randy Scott

Okay. Well thank you for participating in today's call andfor your continued interest in Genomic Health. We look forward to seeing someof you at the upcoming JPMorgan Small, Mid-Cap Health Care Conference nextweek. Thanks and good bye.

Operator

That concludes today’s conference call. You may nowdisconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!