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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 - JMP Securities

Bruce Jackson - RBC Capital Markets

Agene Timbale - Lehman Brothers

Davis Petersen - JP Morgan

Eric Chriscuolo - Thomas Weisel Partners

Verne Passim - Citadel Investment Group

Dave Clair - Piper Jaffray

George Zavoico -- Cantor Fitzgerald.

Operator

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

Brad Cole

Thank you. Good afternoon, everyone and welcome to Genomic Health's Third Quarter 2007 Conference Call. Before we begin, I would like to remind you that various remarks that we make on this call that are not historical including those about our future financial and operating results, future plans and prospects, the impact of technological advances on our business, the success of our business strategy, future publications and presentations, the impact of clinical data on demand, enhancement stock of GHDX, economic benefits and value to payers, of our tests, market trends, growth opportunities, our product pipelines, our competitive position, demand for our tests and drivers of demand, payer coverage and progress in patient access, our investment in our product pipeline and commercial organization, clinical outcomes and timing of clinical studies, our growth potential and our expectations regarding our ability to comply with potential FDA regulation, constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our quarterly report on Form 10-Q for the quarter ended June 30, 2007 filed with the SEC, in particular to the section entitled "Risks 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 thereof and we disclaim 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 us today are Kim Popovits, our President; Joffre Baker, our Chief Scientific Officer 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 especially pleased to report that the American Society of Clinical Oncology or ASCO, last week announced updated clinical practice guidelines on the use of tumor markers in breast cancer that recommend the use of Oncotype DX in breast cancer treatment planning.

ASCO's clinical practice guidelines serve as a guide for doctors by outlining appropriate methods of treatment and care. Because guidelines have historically had a significant impact on clinical practice, we believe this event marks another significant step forward for the role of Vitro Diagnostics in personalizing cancer treatment.

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

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

Kim Popovits

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

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

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

Patients that access Oncotype DX continued to increase in the quarter, as we gained positive covers decisions from both national and regional players. Today more than half of all U.S. insured life are covered for Oncotype DX. We believe this significant accomplishment further demonstrates the growing support for the value of Oncotype DX brand to clinical practice and treatment 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 Arizona established a new coverage policy covering approximately one million lives.

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

We believe that the newly published ASCO's guidelines are a compelling, independent review of the clinical utility of Oncotype DX that will provide further simulation for all payers to consider adopting or expanding coverage policy.

In addition to the progress we have made with payers, the commercial organization is developing innovative programs to increase the value of our service by reducing barriers to access, and by supporting educational resources for physicians and patients. We have increased our direct to patient efforts, and encourage you to visit our newly launched website for patients; MyTreatmentDecision.com.

We also successfully launched a new streamline ordering process late in the quarter. Also late in the quarter we began to see the impact of the sales representatives we hired earlier this year. With these elements in place and with the updated ASCO guidelines in hand, we expect to drive continued adoption and reimbursement progress through the end of the year.

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

Brad Cole

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

Product revenue from Oncotype DX in the third quarter of 2007 was $15.8 million, greater than 125% increase, compared to $6.9 million for the same period in 2006, and reflects test volume from increased adoption and importantly improved conversion of billings into revenue, as a result of continued progress in reimbursement.

Product revenue on accrual basis was 31% of total product revenue, 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 third quarter of 2007 as compared to $2.7 million in the third quarter of 2006. Our gross margin of our product revenue for the third quarter was again greater than 70%, as it has been throughout the year. The gross margin was 72% in the third quarter of 2007, compared to 61% in the third quarter of last year.

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

The increase in total operating expenses included FAS 123R stock-based compensation expense of $1.6 million compared to $0.8 million for the third quarter of last year. The company recorded a net loss of $7.3 million in the third quarter of 2007, compared to a net loss of $8.2 million in the third 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 nine months of 2007 was $21.3 million compared to $19.9 million last year as we invested the increased revenue back into our development and commercial expansion programs. Excluding FAS 123R expenses, the year-to-date loss decreased 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. The September 2007 balance reflects $50 million raise in our follow-on offering completed in May of this year and approximately $20 million of cash used year-to-date to fund operations and capital investments.

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

Randy Scott

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

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

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

We along with SWOG will submit these data for presentation at the San Antonio Breast Cancer Symposium in December. In addition, multiple abstracts regarding Oncotype DX have been accepted for San Antonio, including two posters and one oral presentation offered by company researchers and collaborators. These abstracts include presentations on single gene reporting, a quantitative estrogen and progesterone receptor expression with Oncotype DX and a comparison between Oncotype DX and [estrogen] online.

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

We believe that these individual genes scores in addition to the Recurrence Score may provide additional valuable information for treatment planning. We see single gene reporting as an opportunity to further increase the clinical value of Oncotype DX and strengthen our position as a leader in the field.

Finally, our clinical 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 several important milestones for Genomic Health, each of which gives us confidence in our business model and long-term prospects to provide patients and their doctors with valuable information to help them determine the best course of treatment for the individual cancer. With greater than 50% of those insured in the U.S. not covered by agreements, contracts or policies for reimbursement of Oncotype DX and with the inclusion of Oncotype DX and ASCO guidelines, we look forward to having a continued impact upon treatment outcomes and improving patient care.

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

Question-and-Answer Session

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 question regarding kind of the sequential growth, the trends in the business right now. If we calculated, test bills are up approximately 3% sequentially, it's down from a 5.5% growth sequentially 1Q to 2Q. Can you help us understand the current tone of business and how much of an impact seasonality may have on that business?

Randy Scott

Yes sure Charles, thanks and in fact we believe that most of that impact is seasonality as we have cited over the last several years, we expect to see some seasonality close around the spring break in Q2 when a lot of people 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 saw in terms of growth quarter-over-quarter. The growth year-over-year has been quite strong. Preferably that's also because the little bit of visibility shows that as people were headed back from vacations in early September, we saw a very strong uptick in test ordered and delivered up late in the quarter as you would expect would be a seasonal effect giving us good momentum moving into the fourth quarter.

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

Charles Duncan - JMP Securities

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

Kimberly Popovits

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

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

So the usage base will continue to expand, our real focus will be on the penetration with the existing customer base, and we expect that between the streamline ordering, the new data that folks are going to see at ASCO, and some of that has already been presented along with the new reps that we 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 average percentage penetration within a practice that you're seeing versus obviously, you're getting very broad penetration with, for the one or two, but any sense as 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 the total population of about 80,000 patients spread across 6,000 to 7,000 customers, an average physician could only potentially see one patient a quarter that falls into the category of, no negative or be a positive for the assay.

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

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

Charles Duncan - JMP Securities

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

Operator

Your next question comes from Bruce Jackson with RBC Capital Markets.

Bruce Jackson - RBC Capital Markets

Hi good afternoon.

Kimberly Popovits

Hi, Bruce.

Bruce Jackson - RBC Capital Markets

You mentioned in a press release that you guys earmarked for your tests, so I was wondering if you had any international revenue in the quarter.

Randy Scott

Yes. We don't break out the international revenue separately from U.S. revenue and so certainly the bulk of our revenue is U.S., but we are continually expanding and thinking about our presence internationally, but the bulk of our efforts would be in the U.S. over the next year. We are beginning to expand there. We have partnerships in the U.K. and Israel and in Japan. So Kim, do you want to say anything else about, just our international business and plans over the next year or two?

Kim Popovits

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

Randy Scott

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

Bruce Jackson - RBC Capital 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 not seeing the impact of their work. We brought a group on early summer and trained them in the late June, July timeframe. It generally takes about three months or so for reps to get up and running and really where we start to see an impact of their work, and that's why, as Randy, I think mentioned earlier as we left to the quarter we're beginning to see the impact of those kind of additional reps, so we have not added more past that.

Bruce Jackson - RBC Capital Markets

Okay, that some 60 in total right?

Kim Popovits

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

Bruce Jackson - RBC Capital Markets

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

Randy Scott

Brad?

Brad Cole

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

Bruce Jackson - RBC Capital 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, so we'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 comments that we have, our business is strong and growing, so we are very comfortable with where we are right now with the price and structures.

Kim Popovits

Okay. And maybe just to add, the price increase did not affect payers who we already had contracts with at that point.

Bruce Jackson - RBC Capital Markets

Okay. Thank you very much.

Randy Scott

Welcome.

Operator

The next question comes from [Agene Timbale] with Lehman Brothers.

Agene Timbale - Lehman Brothers

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

Randy Scott

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

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

Agene Timbale - Lehman Brothers

And then just to discuss the colon cancer program. Can you remind 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 then also is that something you're designing in concert with the FDA?

Randy Scott

Well, we're currently not commenting on any plans with regard to FDA. We certainly have, and will continue to have, ongoing dialogues also 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 plan was to be in position to do a validation study in 2008. We're on target to do that, so we've conducted four clinical studies that we've used for discovery process 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 we were able to report the results of two of the studies about it at our prior ASCO, and that the additional two studies we did to identify the genes to take forward for clinical validation have certainly led us to increase the resources and accelerate the work that we are doing to get us to that validation study next year.

Agene Timbale - Lehman Brothers

Is that something we could still expect to 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 an uncertain regulatory situation right now. So some of that may depend on final FDA draft guidance and what regulatory path that we would have to take. So 2009, we're on target for that, but we'll have to see what regulatory feedback we'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; I guess, Kim, I am wondering and this may be just even two broad a question. But can you may be talk a little bit about the decision making process that happens following this from a physician standpoint, following the ASCO guidelines and is this something that sales force has seen a immediate uptake from, were there a good amount of potential customers out there that were waiting for something like this to tip the scales?

Kim Popovits

Yeah. In general, what we can say is that and I think we're delighted with, as the guidelines really represent an independent evidence based review of all of the tests in this category and absolutely has supported Oncotype DX as the test that has met that clinical validation hurdles. So do we think that, that will have an impact on physicians and payers? Yes, we do, over time. It would be difficult to say that in 24 hours, we are going to automatically see major things happen, but we do know that ASCO guidelines have historically influenced this community has approached to treating patients from the, our practice guidelines.

We have had a number of payers over the past year. So suggested that they are waiting to see standard practice guidelines before they make decisions. So we will be back talking with them. And in some cases we will be back talking with payers regarding expanding there current, our coverage policies due to these guidelines. So, yeah, we do think that it will have an impact 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; do you know how big that could be if you were to work due to restrictions from a covered life standpoint?

Randy Scott

That's difficult to say. WellPoint put a number of restrictions on 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 step forward in the right direction and we'll be working with them, especially now with the guidelines in place and try to move them towards coverage of all their patients that would fit the guideline criteria.

Davis Petersen - JP Morgan

Okay, great and Brad just a quick question, I think I missed it. 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, total product 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 the majority 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 Thomas Weisel 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 this previously. Is there any expectation right now when that node-positive indication, if you start to be marketing that?

Randy Scott

We are not giving out any information with regard to future marketing plans. That'll be inappropriate for us to do. The next step is really for the data to be first presented and we with our partners at the Southwest Oncology Group and collaborators will take the lead on that. So we will await presentation of the data before we make any comment with regard to our future commercial plans.

Eric Chriscuolo - Thomas Weisel Partners

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

Kim Popovits

Certainly typical coverage contracts and we do have a number of payers that we are working with, actually at our request, as well to track the impact that the contracts are having on treatment decisions. But there is some apart, I think a bit more informal study is going on in that regard but not 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 [Verne Passim] 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 see the back lash from the FDA concerning 510 approval in the future. And will that have; is there any current possible effects on the Oncotype DX testing presently?

Randy Scott

Well it's hard to measure exactly what’s happening in the market, but we've seen our market adoption and penetration as they continue to grow on a pretty steady basis, even given the regulatory guidelines structure that is out there currently. So, we think that good science is good science and the market first and foremost looks to the science behind the technologies and behind 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 the level of acceptance of the science of our test for Oncotype DX. So we will continue to work with regulatory authorities around the current [test times] and how that goes forward. But we believe overall in the market place that physicians and payers are predominantly focused on the science of the test and not necessarily the regulatory issues, per se.

Verne Passim - Citadel Investment Group

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

Randy Scott

Remember that the current FDA guidelines actually are only effective for what was called IVDMIA, that is in vitro diagnostic multivariate index assays, and so that's a special process assays that involve the combination of multiple gene or data points that are indexed into a score such as our Recurrence Score.

So that market as the FDA has expressed interest in is actually a subset of a total laboratory development testing markets, so it's quite possible that other companies, they don't fall within that classification.

Verne Passim - Citadel Investment Group

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

Randy Scott

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

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

Verne Passim - Citadel Investment Group

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

Kim Popovits

Welcome.

Operator

Your next question is from Bill Quirk with Piper Jaffray.

Dave Clair - Piper Jaffray

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

Randy Scott

Good.

Dave Clair - Piper Jaffray

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

Kim Popovits

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

Dave Clair - Piper Jaffray

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

Kim Popovits

Yeah. Well you can imagine our managed care team were quite excited 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 a great news for personalized medicine and certainly for breast cancer patients that Oncotype DX made the guidelines and we hope that it will have impact in those settings.

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

Dave Clair - Piper Jaffray

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

Kim Popovits

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

Dave Clair - Piper Jaffray

Okay. Thanks a lot.

Kim Popovits

And you are welcome.

Operator

Your next question is from George Zavoico with Cantor Fitzgerald. 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 a really quick question, first on the couple of; I want to address something that Charles 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 staffs suite, but they are ahead of the demand cure obviously.

George Zavoico -- Cantor Fitzgerald.

Okay, and now getting back to what Charles brought up in his first question, I am a little confused about this disconnect between the test delivered to the total physician, they seem to be growing the test delivered a little 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 tests delivered seems to parallel fairly closely to total physicians. But this last quarter was a bit of bigger difference there and compared to 2006, you actually grew the test delivered relative to the Q3 than you did, than in 2007. Is the impact on seasonality for some reason a little bit harder or more impactful this year or what would your attribute that disconnect there?

Randy Scott

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

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

George Zavoico -- Cantor Fitzgerald.

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

Kim Popovits

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

George Zavoico - Cantor Fitzgerald

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

Kim Popovits

Yeah. You know, typically when you do market research, one of 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 because it's a complex environment that we're working in and trying to coordinate between the physicians, payers, and patients.

On another high service component to Oncotype DX, where we really did need to get the territories a little smaller, so reps could be in front of the customers more often, and that was our goal in bringing a turn on in the summer. And we're now seeing an impact from them. As Randy mentioned we'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 and maybe [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 grow overall. So we haven't seen any real impact. But yes, we think this is a great space and it's obviously going to draw competition. So we expect this to be a highly competitive build over the years, which is precisely why we continue to invest so heavily in clinical research and development.

And are now on our seventh major validation study with aromatase inhibitor study that's ongoing right now, of which only three of those studies have been published today. So we have a lot of data yet to publish moving into the future, and now with ASCO guidelines, we think we're really in a very strong position vis-à-vis the competition to be the leader in this space for some 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 that was notable in the ASCO guidelines is I think they took a major step in educating the community that not all these tests are equal. Clearly we are very pleased with the strong recommendation for Oncotype DX and clearly it was based on the clinical evidence and the published data especially with regard to Oncotype DX and chemotherapy benefit, but it really does allow selecting patients for whom a key treatment decision needs to be made.

George Zavoico - Cantor Fitzgerald

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

Randy Scott

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

Steve Shak

Yeah. Although, right now, certainly, Oncotype DX is frequently used when either tamoxifen or an aromatase inhibitor is planned. Its certainly is going to be great interest for us to specifically get data with regard to an aromatase inhibitor study and so that study, we've announced that we are now in and we are doing that and are very excited about seeing those results 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 - Leerink Swann

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

Randy Scott

Hi, Carlo.

Carlo Wong - Leerink Swann

Hey, how is it going?

Randy Scott

Good.

Carlo Wong - Leerink Swann

I have a couple of question and please forgive us of you've already answered them but we are wondering what exactly is the accrual testing volume on a quarterly basis? I think you mentioned what the accrual revenue yield 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 - Leerink Swann

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

Brad Cole

No, we really haven't. Many contracts will be renegotiated in 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 a while to build into the system.

Carlo Wong - Leerink Swann

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

Brad Cole

Are you looking for what we were contracting and we're actually getting paid on fields basis because they are really kind of two different worlds.

Carlo Wong - Leerink Swann

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 just starting now to see contracts offer $3650. On fully adjudicated claims that are don't have a contract when they go to through the fulfill process, its around $3000.

Carlo Wong - Leerink Swann

Okay.

Brad Cole

So if you are modeling it in the order of something between 3000 and 3300.

Carlo Wong - Leerink Swann

Okay. That is actually very helpful. And as far as '07 guidance 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 in February this year. The only adjustment to that guidance we have given as we think revenue will be near the top end of that guidance and we still hold to that.

Carlo Wong - Leerink Swann

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

Randy Scott

All right.

Kim Popovits

You're welcome.

Carlo Wong - Leerink Swann

Take care.

Operator

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

Randy Scott

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

Operator

That concludes today’s conference call. You may now disconnect.

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Source: Genomic Health Q3 2007 Earnings Call Transcript
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