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Genomic Health Inc. (NASDAQ:GHDX)

Q1 2008 Earnings Call

May 6, 2008 4:30 pm ET

Executives

Randy Scott - Chairman and CEO

Brad Cole - CFO

Kim Popovits - President and COO

Joffre Baker - Chief Scientific Officer

Steve Shak - CMO

Analysts

Bruce Cranna - Leerink Swann & Company

Charles Duncan - JMP Securities

Tycho Peterson - JPMorgan

Bruce Jackson - RBC Capital Markets

George Zavoico - Cantor Fitzgerald

Amrit Nagpal - Weintraub Capital

Matthew Scalo - Canaccord Adams

Mike Tu - Pacific Global Health

William Quirk - Piper Jaffray

Eric Criscuolo - Thomas Weisel Partners

Good afternoon. My name is Kathryn and I will be your conference operator today. At this time, I would like to welcome everyone to Genomic Health first quarter 2008 financial results 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, Chief Financial Officer of Genomic Health Conference, you may begin your conference.

Brad Cole

Thank you. Good afternoon everyone and welcome to Genomic Health's first quarter 2008 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 success of our business strategy, the impact of clinical data on demand for our tests, economic benefits and values to payer, excuse me, to payers of our tests, growth opportunities, future products, product enhancements in our product pipeline, 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 regulations, constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our annual report on Form 10-K for the quarter ended December 31st, 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 hereof 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. Also joining us today are Kim Popovits, our President; Joffre Baker, our Chief Scientific Officer; and Steve Shak, our Chief Medical Officer.

We are pleased with our first quarter financial results and the growth in adoption and reimbursement of our breast cancer assay. We are clearly seeing the positive influence of the incorporation of Oncotype DX into treatment guidelines by ASCO and NCCN and believe overall usage is expanding to a broader population, based on the mounting clinical evidence supporting the clinical utility of the test in breast cancer treatment planning.

We believe that first quarter product revenue growth of 78% and growth in tests delivered of 68% represents further evidence that physicians are incorporating Oncotype DX as standard practice and that payers are supporting this trend by expanding coverage for an appropriate patients.

Our business is based on a foundation of solid scientific evidence and a clinical development process supported by world-class collaborators, who share our mission to improve the quality of treatment decisions in cancer. We remain committed to working with physicians and health plans to ensure broad access to our service by demonstrating both the clinical utility and economic value delivered to patients and our healthcare system.

We believe these fundamentals will continue to drive our success in breast cancer as well as other cancers targeted in our development programs. With this in mind, I will turn the call over to Kim Popovits to discuss the specifics of our commercial progress with Oncotype DX for breast cancer followed by Brad Cole, who will review our first quarter financial results. I will close with and overview of the progress we are making with our development programs and leave you with our outlook for the remainder of 2008. As always, we look forward to your questions and comments during the Q&A. Kim?

Kim Popovits

Thanks Randy, and good afternoon everyone. More than 9,150 tests were delivered in the first quarter of 2008, compared to more than 5,450 in the first quarter of 2007. We believe the increase in tests delivered this quarter reflects the impact of the ASCO and NCCN treatment guidelines, the increase in coverage we are seeing among the payer community and the growing evidence supporting the clinical utility of Oncotype DX.

This new rate of adoption and acceptance by payers marks an important milestone in driving Oncotype DX towards standard of care. To date, I am pleased to report that more than 55,000 test results have been delivered to patients.

In the quarter, we began providing measurements of quantitative gene expression for estrogen and progesterone receptors in all Oncotype DX reports and have received positive feedback related to the utility of this information in treatment planning.

We are also seeing an increase in the uses of Oncotype DX for certain nodes-positive patients, based on the date presented last December suggesting that Oncotype DX maybe useful in predicting survival without disease recurrence as well as chemotherapy benefits for patients with node-positive disease. These new developments reflect our desire and ability to further enhance the value we are delivering to physicians and patients.

We also continue to make significant investments in our commercial organization, both towards our growth and our ability to provide the highest possible level of service to our customers.

Specifically we expanded our sales force in 2007 and believe this expansion is paying off, along with additional investments made in our reimbursement support services and enhancement to our ordering process as demonstrated by increased physician demand and payer support.

We continue to make progress as reimbursement this passed quarter by increasing the number of covered lives by 21 million; bringing overall coverage to approximately 80% of US insure lives. Positive coverage policies were established with several Blue Cross and Blue Shield plans, including plans in Illinois, New Mexico, Oklahoma, Texas, Iowa, and North Dakota, North Carolina, Tennessee, Kansas, and Rhode Island, as well as with the Health Alliance Plan of Michigan. In addition, WellPoint, the largest private health benefits provider, expanded it's coverage of Oncotype DX.

We will continue to pursue coverage policies of all payers and we will also work to expand existing policies as new clinical data emerge. For example, we are beginning to work to expand reimbursement policies to include certain patients with node-positive disease. We expect that the process for gaining reimbursement for node-positive patients will require the same diligence as for node-negative disease, including clinical data, peer review publications and demonstrated physician adoptions.

While this will take time, we believe the clinical data and physician demand will support coverage expansion. In the meantime, we will continue to provide reimbursement assistant to all patients, working with payers on a case-by-case basis.

In late 2007, the centers for Medicare and Medicaid services, announced that Palmetto Government Benefit Administrators will replace National Heritage Insurance Company as the Medicare administrative contractor. With Palmetto expecting to assume full responsibility for Medicare claims in September of 2008, this type of administrative change is a normal occurrence in Medicare's course of business.

It is also worth nothing that Palmetto has experience with our test as they currently reimburse Oncotype DX through their administration of the railroad workers health plan.

As clinical evidence continues to grow, our goal is to make Oncotype DX the standard of care, similar to testing for estrogen and progesterone receptor by virtue of gene expression.

We also believe that a similar opportunity exists in international markets and that our success in the United States supports expanding our international presence. Toward that end, we have recently expanded our relationship with several pharmaceutical industries to include Turkey and have established a partnership with GeneKor to distribute Oncotype DX in Greece. With these arrangements, we are not receiving samples for more than 30 countries.

With that, I will turn it over to Brad to review our financial for the first quarter.

Brad Cole

Thanks, Kim. Our first quarter revenue was $23.4 million compared to $14.1 million for the first quarter of 2007. Product revenue from Oncotype DX in the quarter was $23.3 million, an approximate 78% increase, compared to $13.1 million for the same period in 2007, reflecting increased adoption, which grew by 68% year-over-year and continued progress in reimbursement.

First quarter 2008 product revenue on an accrual basis was 50% of product revenue compared 35% of product revenue in the first quarter of 2007. The continued growth in demand reflects payers who have moved to an accrual basis over the course of 2007 and additional payers moved to an accrual basis in the first quarter of 2008.

As in previous years, we saw strong adoption in the first quarter coupled with an improving reimbursement environment, driving interest revenue. Quarter-to-quarter fluctuation is expected in reported revenues.

Cost of product revenue was $5.9 million in the first quarter of 2008, as compared to $3.8 million in the first quarter of 2007. Our gross margin on product revenue for the first quarter was 74.8%, a more than 3-point improvement over 71.5% in the first quarter of last year. We expect gross margin rates to be in the range of first quarter results for the full year of 2008.

We also had an evening shift in our commercial laboratory during the first quarter as part of the steps we have taken to meet anticipated demand for Oncotype DX and eventually assays currently in development. We can now process 12,000 tests per quarter and expect to see our capacity for Oncotype DX to further increase in the second half of 2008.

Operating expenses for research and development, and selling and marketing, and general and administrative expenses increased $7.3 million to $24.7 million in the first quarter versus $17.4 million in the same period in 2007, reflecting the full quarter impact of the expansion of our sales force, increased investments, and physician education programs and other commercial initiatives following the San Antonio Breast Cancer Symposium in December, as well as increased research and development spending on programs for both breast cancer and other cancers.

Other expense increases were associated with the increased scale of our business, including billing and collection costs on higher revenues.

The increase in total operating expenses included FAS 123 stock-based compensation expense of $2.3 million in the first quarter of 2008, compared to $1.3 million for the same period last year.

Net loss in the first quarter of 2007 of $6.6 million, slightly narrowed, from $6.9 million a year ago. Excluding FAS 123R expense, net loss for the first quarter of $4.3 million was $1.3 million less than the $5.6 million in the same period in 2007. Our first quarter net loss, as stated, was slightly less than a year ago.

We continue to expect a narrower net loss in 2008 compared to 2007, with our net loss in the range of $15 million to $20 million for all of 2008, while we continue to invest in our product pipeline and commercial and clinical laboratory infrastructure, including the additional staff, clinical development, research and marketing programs and investment in regulatory and quality systems.

Cash and cash equivalents and investments at March 31, 2008 was $65.4 million compared to $68.4 million at December 31, 2007. Approximately $6.7 million of cash was used during the first quarter of 2008 to fund operations and capital investments, offset by initial research payments from Pfizer.

I will now turn the call back over to Randy.

Randy Scott

Thanks, Brad. As we have mentioned before, the corner stone of our strategy is ongoing clinical study and peer review validation of our tests.

We are encouraged that we continue to see independent physicians and researchers presenting new findings around Oncotype DX. Just last week, three abstracts on the impact of Oncotype DX on treatment decisions were presented at the 2008 annual meeting of the American Society of Breast Surgeons.

Two of these studies showed a significant change in treatment recommendations and reduced use of chemotherapy using Oncotype DX versus traditional measures alone.

A third study, examined how accurately cancer specialists could predicts Oncotype DX recurrent score results based on standard, clinical, and histologic information. This study found that physician's predictions were correct in only 50% of cases.

Collectively, these studies provide further evidence that Oncotype DX is changing medical practice and optimizing the benefit of appropriate chemotherapy.

Turning now to our pipeline, let me first touch on a few areas where we are looking to expand the utility of Oncotype DX. We plan to evaluate the use of the Oncotype DX 21-gene panel and also seek to identify other genes that may be useful for treatment planning in women with Ductal Carcinoma In Situ or DCIS, which affects approximately 60,000 women per year in the United States.

We are also conducting a study using Oncotype DX in node-negative estrogen receptor positive patients who were treated with Aromatase Inhibitors. We hope to report results of this study later this year.

Our efforts to develop a colon cancer test are making solid progress. Studies presented in January at ASCO's GI Cancer Symposium, identified genes that could help predict the likelihood of recurrence and chemotherapy benefit for early-stage colon cancer. We have now finalized a panel of 18 genes, which we believe to be both prognostic and predictive for our Oncotype DX colon cancer assay. This gene set is now undergoing analytical validation and we anticipate beginning a clinical validation study in the second half of this year.

We are also pleased with our progress of partners in exploring genomic tests for determining which patients are likely to respond to treatment with targeted therapies. Two abstracts from our collaborations with partners have been accepted for presentation at the 2008 ASCO annual meeting, taking place May 30 to June 3, 2008.

The first abstract is titled Evaluation of Tumor Gene Expression and KRAS Mutations in formalin-fixed paraffin embedded tumor tissue as predictors of response to Cetuximab in metastatic colorectal cancer.

The second abstract is titled Predictive Utility of Progesterone Receptor in Multi-Gene Expression, an Identifying Benefit from Adjuvant! Doxorubicin plus cyclophosphamide or docetaxel in an intergroup trial E2197.

These studies were conducted through two separate collaborations. The first collaboration is a partnership with Bristol-Meyers Squibb and ImClone systems to develop a genomic test to predict the likelihood of benefit from treatment with Cetuximab, which is known by the brand name Erbitux, a targeted therapy currently approved for the treatment of metastatic colorectal carcinoma.

The second collaboration is an agreement with Eastern Cooperative Oncology Group in Sanofi-Aventis around identifying genes and information related to benefit from treatment with docetaxel, an important drug for the treatment of breast cancer.

These presentations reflect our early work in targeted therapies and we are enthusiastic about the future of this critical area of research and our roll in advancing it.

In addition, we initiated a third collaboration with Pfizer to develop a prognostic test for patients with renal carcinoma, the most common type of kidney cancer in adults and this is in the early stages of clinical development.

In conclusion, we believe that Oncotype DX is becoming the standard of care for early stage breast cancer patients. We anticipate continued steady growth for our business over the remainder of 2008 and strive to continue to lead the field of molecular diagnostic and cancer.

By building upon our experience and developing Oncotype DX for breast cancer, we are eager to move forward with our plans for expanding offerings that support our mission of bringing individualized genomic information to clinical practice.

While we assume that this year will present challenges, such as regulatory uncertainty and possible competition, we believe that we have the resources and leadership to further our lead in personalized medicine.

We have built a strong brand in Oncotype DX through good science, compelling clinical evidence, and a focus on building long-term relationships with physicians, payers, and patients.

We realize that our future depends on our continued ability to deliver good science while making wise investments in resources to grow our company, advance our pipeline, and to prepare to move into additional international markets.

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 line of Bruce Cranna.

Bruce Cranna - Leerink Swann & Company

Hi, good afternoon.

Randy Scott

Hi, Bruce.

Brad Cole

Hi, Bruce.

Bruce Cranna - Leerink Swann & Company

I guess first question from me, the -- I am just curious last quarter you guys gave us some guidance on test volume expectations and revenue for the year. This quarter to me looks to be pretty solid and I am wondering are you still thinking for the year, I guess Brad or Randy or Kim or anyone, 34,000 to 37,000 tests still kind of a good test volume number and the $100 million to $110 million in revenue still appropriate?

Randy Scott

Yes, Bruce, as we have indicated in years passed, Q4 and Q1 seem to be our greatest sequential growth months. So we would expect, as we have seen in the past, to see slower growth rates in Q2 and Q3, just like we did last year, and then some pickup again in Q4. So we are pleased with Q4, we had what I thought was a great San Antonio Breast Cancer conference and a lot of positive momentum coming off of the ASCO and NCCN guidelines, which led to a strong Q1, but we would expect to see a pullback in the rate of growth in Q2 and Q3. That, in essence, follows a traditional vacation pattern for both in the patients and physicians taking vacations in the spring and in the summer.

Brad Cole

And as far as our full year guidance goes, we still believe that is the proper guidance.

Bruce Cranna - Leerink Swann & Company

Okay, yes, I seem to think -- or I seem to recall last year was kind of flattish 2Q and then 3Q and then ticking up in 4Q, but I guess I tend to give a little bit of a higher number for the year, but if you think the 34 to 37 are still reasonable that's okay with me?

Brad Cole

Yes, obviously we will learn more with each passing quarter, but we fully expect that you are not going to see those types of growth rates in Q2, Q3, we have got several years of now of experience seeing, those pullbacks in early diagnosis in those months.

Bruce Cranna - Leerink Swann & Company

Okay. And then Brad, the 50% accrual rate in the quarter that looks like a big jump to me also from last year, I know this is a tough questions, but how should we think about this about the accrual rate going forward. It's kind of a key factor of the model here?

Brad Cole

Yes, I think the way to think about is it will increment up in small steps from here on forward. What you are looking at is a big jump is year-over-year, but from fourth quarter it was from 47% up to 50%. So we would expect that it would move up in small increments just from this point on.

Bruce Cranna - Leerink Swann & Company

So it should increase from this level at some rate?

Brad Cole

Some rate, but it's not -- it's just -- it's bumpy, right. When somebody actually moves across it, it jumps a bit, but not in big numbers.

Bruce Cranna - Leerink Swann & Company

Right, and then the portion of your revenue that's cash-related looks like it kind of sucked back a little in the quarter. Is that also just a lumpiness we should come to expect or is that, I guess, a new rate there or new level?

Brad Cole

You mean the change in cash?

Bruce Cranna - Leerink Swann & Company

I am -- no, talking about the cash portion of the revenue stream.

Brad Cole

Well that -- it's really just how we recognize and how we characterize it, so they can help out with your models. I mean we -- all of the accrual revenue is cash that we are collecting as well. So when a really strong payer moves through to the accrual side, then cash is going to drop down a little bit. So this is pretty dynamic, maybe we should -- we can talk about that offline, but it's not that there is less cash coming in, there is actually more cash coming in.

Bruce Cranna - Leerink Swann & Company

No, I just actually meant the other half of the revenue stream that's not accrual testing. Just using that as a plug to get to the top line, but we can talk about that later.

Brad Cole

Yes. That's what we think of it. Okay, Bruce, we should probably take some questions from some other people.

Operator

Your next question comes from the line of Charles Duncan with JMP Securities.

Charles Duncan - JMP Securities

Hi guys. Congratulations on a very strong quarter in terms of tests built and thanks for taking my question. I wanted to ask a follow-up to Kim's comments on Palmetto in the September '08 full responsibility. Can you give us additional color on kind of the types of conversations you are having with their chief medical officer, if you will, and how you feel about those relative to the evidence you have before NHIC decided to reimburse?

Kim Popovits

Yes, Charles, I should probably start by saying in the course of business, what we are seeing here now is this change with Medicare with their administrator is not uncommon and we do not expect necessarily that Oncotype DX will be singled out for any particular reason. As you might imagine it's a fairly small percentage of the Medicare population. So with the enormous transition that they're making that will reflect all of the coverage decisions that are out there for various products, we wouldn't expect this to get much attention.

We clearly are prepared to address any questions that would come up, as you know, Medicare was an early adopter in 2006 for Oncotype DX. They did an extraordinarily rigorous review at that point and time, looking at both the clinical evidence, and the economic value of the test. And you also know that since that time, that evidence has only been mounting quarter- after-quarter. So we would a) be surprised if this were to create much attention with Medicare and b) are fully prepared to begin to address any questions that they may have.

And I would just again highlight that Palmetto has experienced with Oncotype DX. So in the event that any questions were raised about it, they have had experience in reimbursing for it through other plans that they are the administrator of.

Charles Duncan - JMP Securities

Have they ever pushed back on that reimbursement in those plans?

Kim Popovits

We are not aware of any push-backs and again I would just maybe highlight that we can only imagine that the clinical utility has increased since their initial coverage decision in 2006. I mean, all the evidence that we see from any analysis done would suggest that treatment decisions are changing on an average 25% to 30% of the time. And clearly we know what the costs of chemotherapy are. So we think we are in great position to continue to strengthen the message around value-based, not just value-based pricing, but value-based reimbursement, which is where we think the field is going to head.

Charles Duncan - JMP Securities

That makes sense to me. If I could ask a quick follow-up on the expanded coverage for WellPoint and some of the other insurance contracts, I don't expect you to go through the whole list one by one. But could you give us some sense as to whether those were more kind of backend loaded? I noticed through the recent highlights, reimbursement and drug demands, so is that something that has occurred recently or did they occur in the first week of January, you know what I am saying?

Kim Popovits

They were spread throughout the quarter. I really couldn't tell you whether -- which percentage was in the beginning versus end, but it wasn't like we had every one them come through in the first couple weeks of the year. So, I would say throughout the quarter we saw those changes. We were very pleased to see WellPoint expand their criteria. We have seen actually some coverage of Micromet.. So we really are seeing the impact of, again, just this mounting political evidence that's suggesting that this test really is driving changes in treatment decisions and bringing a great value to treatment planning.

Operator

Your next question comes from the line of Tycho Peterson from JPMorgan.

Tycho Peterson - JP Morgan

Hi, good afternoon. You guys showed so much growth margin leverage this quarter, can you give us a sense -- I know you talked about some capacity addition. And maybe for starters how we should think about where you could end the year in terms of capacity? I think you said you're at 12,000 tests per quarter now and then also what we should think about in terms of gross margin progression throughout the year?

Randy Scott

Now Tycho, I am not so sure that there is going to be a lot for gross margin progression. We kind of like having it arrive, like you said, and we managed progress of 74.8%. We are going to continue to invest in capacity, but also invest in kind of the robustness of the systems to support the clinical reference laboratory. And so we think gross margins in the 75% range are reasonable for the balance of the year.

In terms of your answer for capacity, we are going to exit the year with significant capacity above where we are at today. We haven't given this kind of forecast before, but we try and stay ahead of it, we should say that by 20% or so of demand.

Tycho Peterson - JP Morgan

Okay. And then internationally I think you are now receiving samples from 30 countries -- similar line of questioning, I mean how do you think about that progressing throughout the course of the year? In other -- are these areas you're focusing your efforts on, either in Europe or elsewhere?

Brad Cole

Yes, Tycho, that our real focus for the last several years, obviously, has been expanding the use of Oncotype DX in the US as we're really seeing success with ASCO and NCCN guidelines, we have never been stronger in terms our reimbursement position in the US and historically we felt like that was one of the barriers to entry.

So, as that barrier is being reduced and the use of Oncotype DX is growing in the US, it's really allowing us to start to look out now at the international markets as a significant growth opportunity. We think the economics of Oncotype DX internationally make just as much as they do in the US.

So we are not going to spend a huge amount of time and effort internationally in 2008, but we are absolutely going to be growing our interest, and presence, and investment in that space and looking, especially forward to 2009, 2010 as we get to invest more in both Europe and Asia and South America, as well as Canada and other areas. So we think it's a significant growth opportunity for us in the future.

Operator

Your next question comes from the line of Bruce Jackson from RBC Capital. Mr. Jackson your line is open.

Bruce Jackson - RBC Capital Markets

Thank you. If you could just talk about the sales and marketing expense a little bit. It picked up from last quarter. What was in that increase in the sales and marketing expense and is this the level that's appropriate going forward?

Brad Cole

Well we think it is the right level and appropriate level going forward. It does reflect the full sort of expenses we have in our sales and marketing organization, like the seasonality we see in demand for our cash. We see additional expenditures in the first -- the fourth quarter and especially in the first quarter following San Antonio. So that is what happened again this year. Making the investment in marketing programs, online patient education, and some other work we are doing with payers as well, that we have alluded to prior quarters. In addition there is personnel costs associated with the first quarter of any year that are costs to company that you have to consider as well.

Bruce Jackson - RBC Capital Markets

Okay, and then was there any increase to the sales force or to the G&A's headcount?

Brad Cole

There was no increase to the managed care team or to the [ROL] and the direct sales force team during the first quarter.

Bruce Jackson - RBC Capital Markets

Okay, and then just one last question, I am just doing this for the sake [of inference]. Was there -- was the average selling price for Oncotype DX, was it up or down versus last year?

Brad Cole

Average recognized in revenue?

Bruce Jackson - RBC Capital Markets

Yes.

Brad Cole

Yes, it's up.

Bruce Jackson - RBC Capital Markets

It's up. Okay, thank you.

Operator

Your next question comes from the line of George Zavoico from Cantor Fitzgerald.

George Zavoico - Cantor Fitzgerald

Hi Brad, Randy, Kim, Joffre, and Steve.

Randy Scott

Hi George.

George Zavoico - Cantor Fitzgerald

Great quarter. Very nice growth in Oncotype DX. Congratulations.

Randy Scott

Thank you.

George Zavoico - Cantor Fitzgerald

This -- part of the sales and marketing expense, is that the new website and with that regard have you had -- are you tracking hits and is that looking pretty good?

Brad Cole

Well there are some costs, especially with online patient education, but it's not a major driver of cost, if that's what you're getting at and we're in the process of putting those plans together, maybe Kim wants to talk about that.

Kim Popovits

Yes, I can respond to just the feedback on the site. We have definitely seen increased traffic into the online patient education that we are doing through mytreatmentdecision.com and we have also put a lot of resources in to building some educational programs that we can use with some of our partners in the advocacy community.

So you will begin to see some of those rolled out over the next quarter or so. The traffic to the site has definitely increased and we have gotten very positive reviews on the value that it's bringing to patients having that opportunity to interact and get questions answered.

George Zavoico - Cantor Fitzgerald

Great. Couple other quick questions. Do you anticipate any price increase in Oncotype DX? You have clearly increased the value, provided new single-gene reporting, node to node-positive, do you have any -- is that coming up in the future?

Brad Cole

Yes, George, as I said, I think we have never been in a stronger position with regard to the value proposition for Oncotype DX with it's acceptance into ASCO and NCCN guidelines and frankly what we thought was some impressive data just presented at the American Society Breast Surgeons. That continues to demonstrate the overall clinical utility. So we would plan in the future to continue to take appropriate price increases for our tests.

George Zavoico - Cantor Fitzgerald

Okay, with regard to the colon test. It's an 18-gene panel, does that include the reference genes or do you have like an additional 4, 5, or 6 reference genes on top of that.

Randy Scott

George, again, the 18-gene includes the reference genes.

George Zavoico - Cantor Fitzgerald

Okay. And that's what, 5 of them?

Randy Scott

Well we're probably going to be providing further comment on the tests and on the study at a later date.

Brad Cole

Yes, so we don't plan then to give out any more detail other than the 18-gene panel for the time being.

Operator

(Operator Instructions). Your next question comes from the line of Amrit Nagpal from Weintraub Capital.

Amrit Nagpal - Weintraub Capital

Hi guys, can you hear me?

Brad Cole

Yes, we can hear you, Amrit.

Amrit Nagpal - Weintraub Capital

I had a couple questions. The first was on R&D expenses. Can you give us a perspective on the costs associated the colorectal program that, I think you said will start the trial in the second half of the year and how much that might cost?

And then the other question was you mentioned that ER/PR testing was added to Oncotype I just wanted to understand whether that was in some cases a separate test or whether that's always a part of the Oncotype test as differently as the test count number, apples to apples, with previously reported periods.

Brad Cole

Well, first of all with regard to breakout, we don't currently breakout any of the expenses across different programs. So I can't give you the detail with regard to separating costs for individual programs.

But with regard to the quantitative ER and PR, what we are doing is releasing that with along with Oncotype DX recurrence report and not as a separate product right now. So that is something that we may continue to look at and work with our clinical colleagues on potential value of separate ER, PR, and HER2 testing, but today that the first step was to begin recording quantitative ER and PR for Oncotype DX with commercial patients.

Amrit Nagpal - Weintraub Capital

So the test results -- the test delivered metric is apples to apples with prior periods?

Kim Popovits

It is, yes.

Amrit Nagpal - Weintraub Capital

Okay, thanks.

Operator

Your next question comes from the line of Matthew Scalo from Canaccord Adams.

Matthew Scalo - Canaccord Adams

Hi guys, just a quick question on deferred revenue, it spiked sequentially. What was the cause of that?

Brad Cole

At the end of my comments on cash, Matt, when we were talking about the change in cash we refer to the initial payments we got from Pfizer. So if you look at the deferred revenue change, that's approximately the amount of money that Pfizer put upfront and of course over time, some of that will get recognized, probably all of that will get recognized, but that's the initial payment.

Matthew Scalo - Canaccord Adams

So the $3.6 million?

Brad Cole

Right.

Matthew Scalo - Canaccord Adams

Okay, okay, thanks. And then as far as the, can you talk a little bit about the structure of the colon study, at least, if it's beginning in the second half of the year, just number of samples? You obviously commented about prognostic and predictive influence as well.

Randy Scott

Yes, I think it's important to highlight we did talk about looking at both prognosis and the prediction of chemotherapy benefits. In terms of actually details as was the case of all other studies, it's just great when our collaborators have the opportunities to present the results at an appropriate meeting and to have them and the clinical results, and sort of take the lead, that was the way that swab data was presented last December with regard to the node-positive breast cancer study.

So again we are certainly excited about initiating this study. It's going to be a big study for us and, again, we can't wait to see the results as well.

Brad Cole

But we don't plan to give out more detail than we have currently given around the colorectal cancer program.

Matthew Scalo - Canaccord Adams

Sure and this is the last question as far as physician education. Was there a specific single event that contributed to increase in sales and marketing? Any conference…

Brad Cole

The first quarter of every year we think is actually a tremendous opportunity for us in terms of continuing medical education and programs around to coming out of the San Antonio Breast Cancer conference and so for us that's a great opportunity to get out and both tell our story with marketing programs, but also to support continuing medical education around the San Antonio Breast Cancer conference and of course with follow-up from the NCCN guidelines. So I think you will continue to see that as in terms of marketing spin with Q1 coming off of or in general coming off of major data presentations by the company to enhance our marketing spend to make sure that people are educated appropriately.

Operator

Your next question comes from the line of [Mike Tu] from [Pacific] Global Health.

Mike Tu - Pacific Global Health

Hi guys, nice quarter. Just a question on your comments around seasonality. If I take a look at your historical numbers throughout the year you have always had a sequential increase in tests delivered and if I do that for this quarter, I kind of get to the high end of your guidance even if tests delivered are flat. So are you just being conservative early in the year or are you seeing something whereas there is seasonality where tests sequentially could be down in Q2 and Q3 due to seasonal issues. Thanks.

Brad Cole

No, I think what you just described is probably relatively accurate. We do not expect to see decreases, but we think they'll be relatively flat in Q2 or Q3. So we are certainly not in a position this early in the year to say, you know, we think it will exceed guidance. We think we are right on track to meet our guidance.

Kim Popovits

I would also add that our increase from Q3 to Q4 last year was rather significant based on the NCCN and ASCO guidelines and the Blue Cross Blue Shield tech review. So we went into the fourth quarter last year with a significant momentum based on those events, which we do not know whether we will have similar type events at the end of this year.

Brad Cole

So I think we are going to be -- if we have seasonality the way we have seen it the last several years, we are generally sitting at the end of Q1 having the same conversation and we would update our guidance midway through the year if we thought that was appropriate. It's just too early.

Mike Tu - Pacific Global Health

Okay, great, thank you.

Operator

Your next question comes from the line of Bill Quirk from Piper Jaffray.

William Quirk - Piper Jaffray

Hey thanks, good afternoon. First question, Brad, I am sorry, you may have mentioned it and perhaps I missed it, but what was the backlog revenue that was recognized in the quarter?

Brad Cole

Didn't mention it, it's not significant. Depends on how you define it, but we do collect from payers who have established policies. Some amount of fees, excuse me, collection from prior periods, but that was not a significant contributor, it did help some. The major -- now you may have observed that the $4 million growth sequentially is one of the biggest sequential growths we have seen and I think it's in effect of ASCO guidelines and NCCN guidelines payers -- many payers come on all the policies and they are paying very well.

William Quirk - Piper Jaffray

Well now you certainly didn't mention it, but had to ask the question. A question actually over to Kim, you mentioned just the initiative around node-positive and obviously it's good to hear that we are getting some patients [interested from] that, but can you just help us think a little bit about the timelines or the -- I guess the formal clinical study in node-positive and I assume that you are probably going to be running the economic study at the same time?

Kim Popovits

Yes, let me talk a little bit about what we are doing in the marketplace and maybe Steve can comment on the clinical side of it.

When we presented the data in San Antonio, we really used that meeting to get input from the leaders around the data and how they may want to use it. It was pretty clear to us post to meeting that many felt like this was information that patients deserved to have in making treatment decisions that had node-positive disease.

So we continued to make that information available and we know that it is helping a number of patients. It represents a small percentage of our current volume, although it is increasing, we do plan to work with payers. We are working with them right now on a case-by-case basis for the node-positive patients and of course we will always continue to do that. Some are interested in looking at putting plans together and in one particular case from Micromet.

So, again, as I said, we believe the data is compelling. The interest at the physician level is quite frankly stronger than what we anticipated it to be. So we'll continue to work, to expand our knowledge in this area as we are across the entire breast cancer population.

So Steve you want to comment on?

Steve Shak

Yes, in terms of the impact of this study, it really has, as certainly as Kim noted, a large amount of impact for certain patients with node-positive disease right away. Some of the more challenging cases for clinicians, certainly that we have heard about, are patients with micro-metastasis. That's very small deposits of tumors in the lymph nodes or patients with a single node that was involved both -- with otherwise favorable signs and so clearly the demand is driven by, again, physicians and patients on a needs basis space in making this important decision whether to be treated with chemotherapy or not.

If in terms of the studies, the study was important not only because it addressed node-positive patients. Again, this was the study that established the benefit of chemotherapy in node-positive breast cancer but it also examined a more current regimen that included anthracyclines, which is a standard regimen.

In terms of the next steps on the clinical side, it certainly is the highest priority for our investigators that slog to get this data published and I think I certainly should be looking forward too down the road. Anticipating the next question, which would be, do I know when it will be published? I think the answer is, as this the case, as in all these cases is no, that's a difficult thing to predict.

Operator

We have a follow-up question from the line of Tycho Peterson from JPMorgan.

Tycho Peterson - JPMorgan

Hi, thanks for taking the follow-up. With the SACGHS report out last weekend, just wondering if you can comment on your kind of general level of dialogue, I guess with FDA and your outlook on any changes in the regulatory this year?.

Brad Cole

Kim?

Kim Popovits

Yes, we continue to have ongoing dialogue with FDA. We are certainly not aware of any significant changes since we spoke with you last. They continue to accept stakeholder feedback regarding the draft guidances that we have seen. No final guidance has been issued here and again just continue that dialogue and in, I think, in a favorable fashion that we have to this point.

Tycho Peterson - JP Morgan

And is -- is there any impact from the GINA, Non-discrimination act helping out, I mean, do you see that as a net positive?

Kim Popovits

Actually we see it as very positive. In fact, I think it's a great example of how a government, industry, all stakeholders, physicians, patients, advocacy group, genetic alliance can work together to really bring personalized medicine into clinical practice. So we think it is wonderful that has happened. We do like to see the next change take 13 years, but again a great step in the right direction and one that we think we can take our leadership position now in the space and begin to do other work that supports things like value-based reimbursement and regulation that supports innovation in moving the field ahead, so that we meet all initiatives, including FDA's initiative around pharmacogenomics.

Tycho Peterson - JP Morgan

Great, thank you.

Operator

Your next question comes from the line of Charles Duncan from JMP Securities.

Charles Duncan - JMP Securities

Thanks for taking the follow-up. I wanted to put a finer point around your efforts on DCIS. Can you help us understand how you are going to evaluate the current 21-gene panel and what you are thinking about in terms of adding additional genes?

Brad Cole

Yes, Charles that's really exactly what we are thinking. There is certainly good reason to be believe you do look at the published literature on DCIS that will -- that there is a small percentage of patients that recur and that all DCIS consumers are not the same. Again, it's difficult to look at gene expression profiles from tumors with a diagnosis of DCIS and in our study we will be looking at both the 21-gene panel and it's value, as well as exploring whether the addition of new genes could be helpful.

Charles Duncan - JMP Securities

Any thoughts on timing of increased visibility there? Is there possibly a San Antonio Breast Cancer meeting '08 event?

Brad Cole

Yes, can't comment yet on the presentation of that.

Charles Duncan - JMP Securities

Okay, and what about AI, aromatics inhibitor, data.

Brad Cole

Yes, we are -- would expect again that these results that we stated earlier would be presented later this year.

Charles Duncan - JMP Securities

Okay, thanks guys.

Operator

Your last question, which is a follow-up question from George Zavoico from Cantor Fitzgerald.

George Zavoico - Cantor Fitzgerald

Hi again, question about the international market, three quick questions. I don't think, are you prepared to say what percentage of total tests were for international, number one?

Number two, is your pricing comparable to the US pricing? And number three, how are you dealing with reimbursement overseas at this point?

Brad Cole

Sure. So first of all we do not plan to break out the international market, but I would tell it's very modest right now as obviously the bulk of our efforts has been focused on the US markets. So eventually I think we'll just look at it as an overall global market. It's currently fairly modest. As I think we have mentioned before we had a very strong relationship in Israel, which is the one place outside of the US where we currently have reimbursement in place through major payers in Israel, so we actually see very similar adoption and reimbursement in Israel like what we have in the US. Outside of Israel, most of what we are doing is working through a patient pay scenario in the short-term, where it's fairly opportunistic. We are putting together marketing agreements with groups that can then work with local hospitals and institutions to pull through samples where appropriate. I think the real long-term opportunity.

However, in the international market is to go down the same path that we went in the US and similar to pulling across US Medicare and the major payers on board is building relationships with the oncology community, locally doing -- conducting clinical studies and utility studies in different regions. That would allow us to then go the nationalized healthcare systems or private payer systems in those countries to get support for reimbursement. So obviously that's going to be a long-term program, but we think it's also a tremendous opportunity and upside.

George Zavoico - Cantor Fitzgerald

All right so at this point, the government and the regulatory authorities aren't involved in the pricing as well, so you're getting pretty much close to the US prices then?

Brad Cole

Yes, currently through the patient pay markets it's just all based around our US price based on dollars currently. Obviously, yes, we moved towards reimbursement by national healthcare systems, etc, that'll be a value based discussion on a country-by-country basis.

Randy Scott

Just one point of clarification, those countries where we have representation, US prices are what we are holding to, the price that we get would be similar or discount off that for the distributor.

George Zavoico - Cantor Fitzgerald

Okay, great. Thank you very much and congratulations again on a fine quarter.

Brad Cole

Thanks, George.

Operator

You have one more question from the line of Eric Criscuolo from Thomas Weisel.

Eric Criscuolo - Thomas Weisel Partners

Hi, thank you for squeezing me in here. I am just filling in for Peter Lawson. I was wondering if you could comment on an impact you've seen either in the U.S. or internationally from the Gendia test?

Brad Cole

Not sure we can follow-up on that. I would say from a competitive standpoint, we always like to focus on what you can see as continued growth of Oncotype DX in the US. We still have a pretty modest effort in the international markets, so we can't comment on that. But certainly we believe that the strong clinical evidence that we have generated over the years have supported in cooperation into ASCO and NCCN guidelines, gives us very substantial advantage in terms of the US market opportunity. So we don't speak specifically to competitors or market share efforts.

As you can see we are continuing to grow strongly in the US. on the basis of that and in fact we think that what was required of us to both achieve adoption and reimbursement is going to be required of many other groups as well. Multiple studies, the evidence of chemotherapy benefits, not just prognosis, real adoption by physicians that can maybe be used to support reimbursement. And that all takes a lot of time and energy and effort, so we continue to think that we will have a strong leadership position in the US for many years to come and look forward to expanding that internationally.

Eric Criscuolo - Thomas Weisel Partners

Okay, thank you and I just, one more question. On the R&D cost going forward, can we expect a ramping up of those expenses in the second half of the year as those clinical trials get underway? Is that a good way to think about those costs?

Brad Cole

Yes, we expect R&D costs to increase throughout the balance for 2008.

Eric Criscuolo - Thomas Weisel Partners

Thank you very much.

Kim Popovits

Thanks.

Operator

There are no further questions at this time.

Randy Scott

All right. Well thank you for participating in today's call and for your continued interest in Genomic Health. We look forward to seeing many of you at the upcoming ASCO meeting in Chicago in June.

Operator

Ladies and gentleman, this concludes today's conference call. You may disconnect.

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Source: Genomic Health Inc. Q1 2008 Earnings Call Transcript
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