Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Genomic Health, Inc. (NASDAQ:GHDX)

Q2 2012 Earnings Call

August 8, 2012 4:30 pm ET

Executives

Emily Faucette – Senior Director, Corporate Communications and Investor Relations

Kimberly Popovits – Chairman of the Board, Chief Executive Officer and President

Bradley Cole – Chief Operating Officer

Dean Schorno – Chief Financial Officer

Steven Shak – Executive Vice President of Research and Development and Chief Medical Officer

Kathy Hibbs – Senior Vice President & General Counsel

Joffre Baker – Chief Scientific Officer

Randal Scott – Founder and Director, Genomic Health and Chief Executive Officer,

InVitae Corporation

Analysts

Dane Leone – Macquarie Research

Tycho Peterson – JPMorgan

David Clair – Piper Jaffray

Amanda Murphy – William Blair

Dan Leonard – Leerink Swann

Kevin DeGeeter – Ladenburg Thalmann & Co.

Scott Gleason – Stephens Inc.

Laura McGuigan – B. Riley

Nicholas Jansen – Raymond James

Operator

Good afternoon. My name is Chuck, and I will be your conference operator today. At this time I would like to welcome everyone to Genomic Health’s Second Quarter 2012 Financial Results Conference Call. All participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions)

I would now like to turn the call over to Emily Faucette, Senior Director of Corporate Communications and Investor Relations. You may begin your conference.

Emily Faucette

Thank you. Good afternoon everyone and welcome to Genomic Health conference call to review our second-quarter 2012 financial results. 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, our plans and prospects, our ability to leverage our existing infrastructure, the success of our business strategy, economic benefits and value to payers of our tests, growth opportunities, future products, product enhancements and our product pipeline, demand for our tests and drivers of demand, payer coverage and progress in reimbursement and patient access, our investments in our business, clinical outcomes and timing of clinical studies, and product launches, and our expectations regarding our ability to comply with potential FDA regulation constitute forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act.

We refer you to our quarterly report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC, in particular to the section entitled risk factors for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date hereof, and we disclaim any obligation to update these forward-looking statements.

Joining me on the call today are Kim Popovits, our Chairman of the Board, Chief Executive Officer and President; Brad Cole, our Chief Operating Officer; Dean Schorno, our Chief Financial Officer; Steve Shak, Executive Vice President of Research and Development and Chief Medical Officer; Kathy Hibbs, Senior Vice President and General Counsel; Joffre Baker, Senior Research Fellow; and Randy Scott, Genomic Health Co-Founder.

I will now turn the call over to Kim.

Kimberly Popovits

Thanks Emily. Good afternoon everyone and welcome. We delivered strong financial results in the second quarter highlighted by a 16% year-over-year increase in test volume, and a 13% increase in revenues. These results were driven by worldwide growth in tests delivered across all products and notably from new markets, including DCIS breast cancer, colon cancer and international. Our growth in tests and revenue, along with net income generated in the quarter, exemplify the strength of our business model and delivering personalized genomics to patients around the world.

In the second half of the year, we plan to continue investing in our prostate cancer program, the development of clinical applications for next-generation sequencing, and the ongoing expansion of our international commercial business. Additionally as announced today, we have concluded that the best path forward to optimize our investment in the field of clinical genetics is to support the combination of InVitae with a private company, Locus Development, to form a separate independent genetics company under the leadership of Randy, which I will discuss a bit more in detail at the end of the call.

I will now turn the call over to Dean and Brad to provide further details on our second quarter 2012 financial results and our commercial and operations progress worldwide. I will then conclude the highlights of our research and development programs, including anticipated milestones and business priorities for the remainder of the year. Dean.

Dean Schorno

Thank you Kim. In the second quarter of 2012, we achieved 13% growth in both product revenue and total revenue. Specifically total revenue was $57.6 million, compared with $50.8 million in 2011, and product revenue increased to $57.2 million compared with $50.5 million in the same period of 2011. Contract revenue comprised the balance of total revenue for the second quarter of 2012.

As a reminder, first-quarter product revenue was higher due to the inclusion of approximately $1.2 million of cash revenues from payments by Medicare for colon tests performed prior to the establishment of coverage. Without this incremental revenue, first quarter product revenue would have been approximately $56.7 million. All areas of our business fuelled our 16% year-over-year growth in test volume as we delivered more than 19,020 Oncotype DX tests during the quarter.

The difference in test volume and product revenue growth rates reflect the continued diversification of our business, and our success in penetrating new markets, including DCIS, colon, and international, where we continue to focus on establishing coverage and consistent reimbursement.

59% of tests delivered, and 67% of product revenue were recorded on an accrual basis in the second quarter of 2012. We expect to see continued variation in these accrual percentages, which are dependent on new test traction and reimbursement success. Our gross margin for the quarter remained at 84% as it was in the same period of 2011. We delivered $1.8 million in net income for the quarter, compared with $2.3 million in the second quarter of 2011.

Net loss related to our investment in our wholly owned subsidiary, InVitae Corporation, was approximately $800,000 for the quarter, and is reflected in our overall results. Net income exclusive of InVitae was $2.6 million. Net income in the quarter resulted in part from lower than anticipated operating expenses. We expect operating expenses to increase during the second half of the year as we continue to invest in our core cancer business with new hires across our global organization, initiation of new studies, and preparation for a potential prostate cancer launch.

Cash, cash equivalents and marketable securities at June 30, 2012 were $113.9 million, compared with $100.5 million at December 31, 2011. We are maintaining our financial guidance for the full year ending December 31, 2012, for test results delivered, for total revenue and the full year net income of $5 million to $8 million for our core cancer business. Overall, we expect full-year consolidated net income to be $4 million to $7 million, an improvement from our previous guidance of break even or a loss of up to $3 million, reflecting the change in loss contribution from InVitae.

As announced earlier today, we have committed to make an additional investment of up to $5 million in the newly combined entities current Series C financing, resulting in an ownership position of less than 20%, with a right to increase our ownership in a future round of financing. We expect to account for this investment under the cost method.

I will now turn the call over to Brad to review our global, commercial and operations progress.

Bradley Cole

Thanks Dean. During the quarter we achieved multiple commercial and clinical milestones, including 18 studies presented at the ASCO symposium in June that we believe will continue to fuel both our breast and colon cancer business worldwide. In June we began offering the Oncotype DX colon cancer test for patients with stage III disease, and subsequently obtained approval to offer the test in New York, making the test available in all 50 states.

The test differentiates risk of recurrence in the context of oxaliplatin-containing adjuvant therapy. Similar to what we established multiple times in stage II disease, the positive valuation study presented at ASCO demonstrated that the same Oncotype DX colon cancer test can more accurately assess recurrence risk in stage III patients beyond traditional clinical and pathologic factors.

These data suggest that the Oncotype DX colon cancer Recurrence Score maybe helpful for physicians and certain stage III patients when weighing the risks versus benefits of oxaliplatin treatment. Separately we are evaluating additional new genes that may be specifically predictive of oxaliplatin benefit, and are on track to report those gene identification clinical study results later this year.

In breast cancer, multiple studies presented at ASCO reinforce the clinical utility of Oncotype DX, its impacts on treatment decisions and its cost effectiveness throughout the world. Specifically, the first decision impact study results from France and another first study from Canada demonstrated that Oncotype DX change physicians’ treatment recommendations for approximately 30% of patients.

These new results are consistent with 15 previous breast cancer decision impact studies conducted across multiple countries. Additional data from the DCIS clinical validation study were also presented at ASCO providing further evidence that the DCIS Score results provides clinical value beyond traditional factors such as tumor grade. However, the findings indicated that the DCIS Score results cannot be predicted using the available clinical and pathological factors.

The Oncotype DX test for DCIS, which was launched at the end of last year, can identify both lower risk DCIS, which may be treated with surgery alone, and higher risk DCIS, for which radiation should be considered in addition to surgery.

Looking ahead, we look forward to the publication of these important clinical validation study results in a peer review journal later in 2012, or early next year. We are also pleased to report the acceptance of two studies at the upcoming ASCO breast-cancer symposium in September.

During ASCO in June we also presented results from our first clinical study in prostate cancer needle biopsies, which demonstrated that the biology observed in prostatectomy tissue can be measured by quantitative RT-PCR even with the limited tissue sample from needle biopsies. Based on this and multiple prior studies, we have initiated a clinical validation study for our prostate cancer test. The study is designed to determine if a multi-gene test can help patients with early stage prostate cancer by distinguishing aggressive disease requiring immediate treatment, such as surgery, from indolent disease, which maybe appropriately managed with active surveillance. We are on track to announce top line results from this study later this year, launching an Oncotype DX test for prostate cancer patients in 2013.

Positive clinical validation study results will lead into further clinical investment beginning later in 2012. We continue to invest in delivering the benefits of Oncotype DX testing to patients worldwide, and as a result our International volume increased 24% compare to the same period last year. As we establish additional international reimbursement, our year-over-year revenues outside of the US grew by 21%, now representing more than 10% of our overall product revenue at quarter end.

Looking ahead to the second half of the year, we expect international revenue comparisons to be even more robust. Recent success in working with both public and private contracted payers in the UK and Ireland should contribute to this. As Dean has mentioned, International test volume has continued to strengthen, yet collections have lagged some as we seek to gain consistent reimbursement, similar to what we have experienced in the United States in the first two years following the launch of Oncotype DX.

As part of our strategy to drive worldwide demand of new business, we continue to build partnerships, conduct studies and implement programs that we believe will increase international patient access for our test. With select countries in Europe, we continue to implement patient assisted programs, similar to those operated in the United States.

During the second quarter we established 30 new international contracts, extending reimbursement for the Oncotype DX breast cancer tests on additional 1.8 million lives in Ireland, one million lives in the Canadian province of Saskatchewan, and 6.3 million lives in the Catalonia region of Spain. These additional agreements bring the total number of ex-US covered lives for the Oncotype breast cancer test to more than 80 million.

We established new distribution agreements to provide Oncotype DX to patients in most countries within the Middle East and Africa. Combined with previously established distribution agreements, we now provide the Oncotype DX breast cancer tests to patients in 86 countries, and the Oncotype DX colon cancer test to patients in 75 countries through these partnerships.

We also recently secured our first hospital contract to begin providing the Oncotype DX colon cancer test in Italy. Physicians in Ireland, Korea and Mexico began enrolling node positive breast cancer patients in the NCI-sponsored RxPONDER trial.

In Germany, researchers began enrolling patients to the West German Study Group ADAPT trial, which also requires a Recurrence Score for study entry, and is targeting to enroll 400 patients.

As we expand our product offerings to move into new international markets, reimbursement will remain a critical success driver. In the meantime, we continued to gain incremental reimbursement traction here in the US with two new colon cancer contracts that together expand stage II coverage to more than 6 million lives, and our first reimbursement for those stage II colon cancer patients through a contract with Geisinger Health Plan of Pennsylvania covering more than a quarter million lives.

In breast cancer, we established node positive coverage for an additional 3.8 million lives. In TRICARE, the healthcare program for military members, retirees and their families approved coverage under a demonstration project for its 9.7 million beneficiaries.

I will now turn the call back over to Kim.

Kimberly Popovits

Thanks Brad. We continue to make exciting progress in our next generation sequencing development effort. The peer-reviewed journal PLoS ONE recently published positive results of a breast cancer clinical outcome study for biomarker discovery using Next Generation Sequencing for whole transcriptome profiling of fixed tumor specimens. These findings, originally presented at the San Antonio Breast Cancer Symposium, widened the lens of looking at cancer biology and represent the promise of Next Generation sequencing as we consider the development of future tests.

Based on these data, we’re moving our next generation sequencing efforts forward, and expect to provide a comprehensive genomic platform for clinical research and development combining both whole transcriptome profiling and mutation analysis later this year. With this in mind, we are delighted to welcome Dr. Sam Levy to Genomic Health in the role of chief scientific officer, a renowned genomic researcher with extensive experience in sequencing and analysis of the human genome, Sam will be taking the reins from Joffre Baker to lead the research organization as Joffre transitions to the role of senior biology fellow, focused on our industry leading biology discovery platform.

Sam has an impressive track record that spans Celera, the J. Craig Venter Institute, and Scripps Research Institute, where he established next-generation sequencing methods and analysis for translational science projects. He will report directly to Steven Shak, Executive Vice President of Research and Development and Chief Medical Officer of Genomic Health.

We believe our established capabilities and working with paraffin-embedded tissue for both expression and mutation analysis, combined with Steve Shak, and now Sam’s expertise further strengthen Genomic Health leadership in translating next generation sequencing discoveries into meaningful clinical applications for cancer patients.

Turning now to our established interest in genetics, as you will recall in early 2011 we began funding the related efforts of Locus Development, a privately held company focused primarily on the consolidation of genetic information to better inform the diagnosis and treatment of genetic related conditions. In February this year, we announced InVitae, our subsidiary formed to improve the quality of diagnosis, communication and support for the millions of patients and their families in the face of common embryo genetic conditions.

Over the past month, as the InVitae business strategy has involved, we have recognized an increasing distinction from our core business in cancer, and at the same time identified meaningful synergies with Locus. We have concluded that the best path forward is to support the combination of the two entities as a separate independent company under the leadership of Randy Scott. This decision allows us to continue to substantial fund and further our business interest in genetics, while continuing to focus our efforts on our core mission in cancer.

The scope of the combined entity, which will be called InVitae, will require great vision, and we all believe Randy is the ideal leader to deliver on the promise of genetics. In becoming chairman of the board and CEO of InVitae, we fully support Randy’s decision to step down from our board of directors as he turns his full attention towards building a world-class company to advance the use of genetics in the clinical setting.

Further we believe this is the ideal way for Genomic Health to optimize our investment in genetics. By consolidating our investment through this single organization, Genomic Health remains focused on the $3.5 billion global cancer opportunity across breast, colon and prostate cancer, as well as developing clinical applications through next generation sequencing, and improving near-term profitability while maintaining a valuable position in the emerging field of genetics. We look forward to the continued collaboration with Randy through InVitae as we work together in leading an industry that is delivering on the promise of genomics and genetics to clinical practice around the world.

For the remainder of 2012, we maintain our focus on investing in our global commercial capability, and advancing our research and development pipeline, including increasing global reimbursement for Oncotype DX tests, securing a DCIS publication in reimbursement, reporting top line results from our prostate cancer clinical validation study, and conducting a co-operative group clinical study using next generation sequencing.

I would now like to open the line for your question.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Charles Duncan with JMP Securities.

Unidentified Analyst

Hi guys. This is [Roy] in for Charles. Thanks for taking the question. Just a broad question on the prostate cancer launch in 2013, can you describe a little bit what gives you confidence in that launch materializing in 2013? I think you still need to see positive data later this year, correct?

Kimberly Popovits

That is correct. As we noted that we are on track to be able to finish our validation study in 2012. So we will look for a venue to discuss that data later in the year. Really 2013, and I will ask Steve maybe to comment on the program.

Steven Shak

In terms of our prostate cancer program, this is a very exciting time for the team here, and it has taken – we really put many of our best people on this. It has been focusing on addressing a very large unmet need in prostate cancer. As you know, we diagnose more than 200,000 prostate cancer a year, and yet because we don’t know which are the ones that are aggressive, and which are the ones that are not, [we] offer the vast majority of them aggressive and immediate surgery with a lot of complications.

The focus of our test is to increase the number of men who are eligible based on an understanding of the biology of their individual biopsy. There are number of those men that might be eligible for active surveillance, and therefore avoid those complications. This is a big goal. The first study is a large steady, and as Kim said, we are on track for getting those results later this year.

We will announce then those top line results, and work with our collaborators who will take the lead in presenting that at a subsequent meeting.

Kimberly Popovits

Thanks Steve.

Unidentified Analyst

Okay. Thank you, and if I can ask…

Kimberly Popovits

You are welcome.

Unidentified Analyst

A question on the NGS – okay. Can I ask one on the NGS, hello?

Steven Shak

Sure.

Kimberly Popovits

Yes. Can you repeat that? We missed it.

Unidentified Analyst

Sorry, I’m cutting out a little bit. On the NGS data that you guys just published that is using fixed tissue, I wonder if you could describe a little bit what has more utility in the clinic, is it fixed or fresh frozen, and are you guys working on fresh or frozen, and how does that look? Thank you.

Steven Shak

Sure. So on this one similar to our focus with RT-PCR, it is a tremendous advantage to take that extra time and effort, and also innovation and ingenuity that allows us to look at paraffin tissue both for clinical studies, but also in the longer term in clinical practice. The reason for that is that is the way the samples are routinely collected, and in that regard actually with regard to prostate cancer, you should be aware that with regard to looking at biopsies, which is critical for meeting the needs of patients, those samples are very, very small and very – and has limited amount of tissue.

And again, our research and development organization has again spent over two years further miniaturizing our technology so that we are capable of looking at those very small amounts of tissue. Joffre is here in the room, and obviously I think the publication of the PLoS ONE article was a big deal for us and I think it has already been examined and looked at many, many times already.

Joffre Baker

Right. No, there have been a lots of hits on the site, the PLoS ONE site, where the article is published. You know, it is something that we are all very excited about having published. It really represents I think an advance in terms of using next generation sequencing, not only on fixed issue, but actually profile the entire spectrum of RNAs made by tissues in a clinical cohort of patients that was sizeable. And I think this is really

going to be part of a springboard for all of our discovery programs here.

Kimberly Popovits

Thanks Joffre.

Unidentified Analyst

Great. Thank you.

Kimberly Popovits

You are welcome.

Operator

Thank you. Our next question comes from Dane Leone with Macquarie.

Dane Leone – Macquarie Research

Hi, thanks for taking the questions guys. Congrats on the quarter.

Dean Schorno

Thanks.

Dane Leone – Macquarie Research

I guess I would just start with maybe a bit more color on the spin out of InVitae, you know, specifically what type of investment Genomic Health had made in Locus Development historically, you know, just plain commitment that exits to InVitae, and how you get to a 20% ultimate ownership in InVitae, sorry, and then finally just can you frame for us the commitment that Randy may or may not have to Genomic Health once he is running InVitae full time, and the residual commitment Joffre has made in the position of senior fellow, sorry I know that was a mouthful?

Kimberly Popovits

That was a mouthful, so I will give you a mouthful back, but I will ask others to chime in. Thanks Dane. You know, we are really excited about this opportunity as we have been watching the InVitae business model and strategy evolved over the past several months it became pretty clear that it is very distinctive from the genomics business, focused in cancer, that Genomic Health has been involved in for the past 12 years.

And along the way, as we have been following Locus closely, we saw a real meaningful synergy with where Locus Development was headed. So, recently we were presented with an opportunity to look at our investment in Locus, and potentially increase that and as we looked at the two entities together, the perfect way to go forward really was to combine the businesses both from a financial and business focus standpoint for Genomic Health.

So the way we have ended up here I think is ideal. We have got an opportunity here to keep a meaningful stake in the genetics world, led by Randy. I can’t think of anybody better to do that. And at the same time we’re able now to really focus on our core business in cancer, and have additional resources to do that. So, again you know, I think it is a great opportunity both ways, and I also want to just mention that relative to your comment around Joffre and around Randy, I personally have been – it has probably been a – truly a highlight of my career to work with a team for over 12 years now we have had the luxury of a very seasoned management team, founders included, and spent a lot of time on succession planning.

And so I think what you are seeing here is an evolution of a very planned effort to allow for these kinds of transitions as we have now today, can say we have executed very well on a successful business model and a new one in healthcare, and our organization has grown substantially. So, I see this transition from Randy as CEO to me for the COO role to go from me to Brad and down, you know, with Dean becoming CFO, Sam now joining us as CSO, really I think just speaks to the amount of time that we put into planning for these transitions and really building a great company for the future.

So that said, I will ask Randy to comment maybe for a minute, and then maybe Dean you can go into the math around the 20%, and how we landed there.

Randal Scott

Yes, so first I just want to say how incredibly proud I am of the whole Genomic Health team. This has been a real joy as well working with this team for the last really 12 years now. And when I passed off the CEO role to Kim, sort of almost 4 years ago now, it has just been amazing to watch the growth in the business under Kim’s leadership, with Joffre and Steve on research and development, the science and technology that has been done here, and a great product development pipeline.

So, I really feel like this is a unique time in which we have got a great management team in place. We have got a great product pipeline, and so we can think about even bigger strategies like moving beyond cancer into genetics, and of course, now having Sam Levy joining as the new Chief Scientific Officer, I couldn’t be more happy to have Sam onboard.

So as many of you may know, when we started Genomic Health, some of that came out of personal influences of having experienced folks in my life with cancer, and some of the needs there, and similarly over the last decade I have had three members of my extended family that have been diagnosed with rare genetic conditions, and so it gives me a really passion about the future of how next gen sequencing can really impact genetics. So as we began pulling together the ideas for InVitae and the investment that we made in Locus became increasingly apparent that combining those two entities just made tremendous business sense.

Locus has really a world-class effort on curating and annotating the human genome in terms of identifying clinically relevant variants. Just recently we (inaudible) license approval in May, and they are now beta testing their first targeted genetics products with the goal of full commercial launch in 2013. And now combining with InVitae, we’re going to expand that effort into whole genome sequencing, as well as comprehensive genome management for physicians and patients.

So we won’t be saying a lot more about the combined InVitae company on this call. That is probably for a different venue, but we think it is a tremendously exciting opportunity, and the small team of InVitae people that we have hired here joining together with Sean George and Michele Cargill, and just a great outstanding team at Locus Development I think is a real exciting opportunity. So Dean maybe you want to talk about the financial aspect?

Dean Schorno

Yes, real briefly from a financial perspective back in March of 2011 we made our initial investment to Locus, $2.3 million. So the combination of that investment plus the additional investment we are making now puts us at that number of less than [20%].

Kimberly Popovits

So less than 20% today, and importantly we have reserved an opportunity to increase that investment going forward in future rounds for InVitae.

Dane Leone – Macquarie Research

Okay, great. Is there any contractual agreement on first look at technology or anything like that with Locus or InVitae?

Kimberly Popovits

No, there is not.

Dane Leone – Macquarie Research

Okay. And then switching gears just a question on colon, are you able at this point to provide more color on the product mix in terms of colon constitutes the overall test delivered this quarter?

Dean Schorno

You know Dane, we haven’t historically provided that kind of color, hence what we can say that is still less than 5% of total test volume, and it is early and it is a relatively small market and we are still in the process of securing the second publication on the [CRGB] study that was presented at ASCO last year. And we think the combination of that and other things in the market we will continue to see growth. We have seen robust growth year-over-year much higher than the overall growth in the company. So the product line is small, but it is growing rapidly.

Dane Leone – Macquarie Research

Okay, great. [I will yield]. Thank you very much and congrats to you both Joffre and Randy.

Joffre Baker

Thanks.

Kimberly Popovits

Thanks.

Operator

Thank you. Our next question comes from Tycho Peterson with JP Morgan.

Tycho Peterson – JPMorgan

Hi, thanks for taking the questions, and best of luck to Randy on the new endeavor, maybe just first as we start to think about prostate with the data coming out later this year, can you help us think a little bit about the infrastructure investments you are going to need to make there in terms of adding urology reps in 2013, how should we think about what is required from your end, once you do get the test out?

Dean Schorno

Tycho you are right, given positive results we would begin to even this year put some resources into that business around marketing, and really field reps. But if you think about differently than what you think about reps in colon today, there is a different customer here. Primarily urologists will have a larger role to play, so we will not be leveraging the sales people, but we will leverage the infrastructure we have around patient access, and billing and what have you.

So, there is many things we can leverage, but we think the sales people won’t be leverageable as we will be investing in a new sales force. Like we did in breast, we are new to that investment along with how the clinical data looks like, and what the reimbursement landscape looks like and so we are not, they will be substantial, but I will have more to say once we have the data. But you won’t see full investment in the first year. It will take some time.

Tycho Peterson – JPMorgan

Okay, and then just sticking with the pipeline for a sec, can you talk a little bit about how you are thinking about the opportunity around oxaliplatin benefit production, I mean, I think you have put some market numbers around that before, I’m just wondering how quickly you think about that opportunity materializing once you launch there as well?

Dean Schorno

As far as today, and as we said, is in process and we expect [genomic] applications later this year. The market itself is really the stage III patients, and it has been really great to see recently that the current score for stage II patients presented at ASCO was affecting the stage III patients and stratifying risk. So, we think that is a good start for the oxaliplatin program. There is more to come. I think there is more that can be done in [the prediction], and that is where oxali will have its biggest benefit.

Stage III patients represent about 30,000 patients each year in the US, and most of those receive oxali today, and so the hope here is that we can identify those patients who had benefited most greatly. So the opportunity will be in that 20,000 to 25,000 patient range.

Kimberly Popovits

Which doubles the market opportunity in the US alone, and then of course there is the ex-US piece, but…

Dean Schorno

The ex-US piece is even bigger we think than the US.

Kimberly Popovits

US.

Dean Schorno

It is more common outside the United States.

Tycho Peterson – JPMorgan

Okay, and then just lost one was there any Medicare catch-up for colon this quarter, I know you had it is about 1.5 million last quarter, was there anything this quarter?

Dean Schorno

That was all completed last quarter, but we had about a million two quarters ago, about 1.2 million last quarter, but that is all done now.

Tycho Peterson – JPMorgan

Okay. Thank you very much.

Kimberly Popovits

You are welcome.

Operator

Thank you. Our next question comes from David Clair with Piper Jaffray.

David Clair – Piper Jaffray

Hi everybody, can you hear me?

Kimberly Popovits

I can hear you.

David Clair – Piper Jaffray

Okay, good. My first question, I was just hoping if maybe you could give us some color on maybe the different segments within breast, you know, how DCIS node positive, node negative, did they all – did node negative grow sequentially year-over-year, anything you can tell us?

Dean Schorno

To make sure I am clear, because you mentioned DCIS as well, are you looking for numbers around US invasive growth, node negative and node positive, is that what you are seeking?

David Clair – Piper Jaffray

Yes.

Dean Schorno

Invasive breast cancer growth in the US overall was in double digits, and we haven't been breaking out the difference between node negative and node positive, both grew year-over-year, and both grew substantially and the combined was greater than 10%. So we're pleased with that and that doesn't include DCIS just in the comparison to the prior year.

David Clair – Piper Jaffray

That's not including DCIS?

Dean Schorno

It does not include DCIS, right. DCIS itself doesn't have any competitor and I gave you a numbers without it.

David Clair – Piper Jaffray

Okay. I think that's it from me. Thank you.

Operator

Thank you. Our next question comes from Amanda Murphy with William Blair.

Amanda Murphy – William Blair

Hi thanks. I just had to follow up on the international market if I may, so you obviously talked to some of the reimbursement improvement that you are targeting outside the US. But I am curious you have had some pretty good volume growth there as well. Do you think that 20% level can hold or do you think that that could also tick up over time, the 20% growth?

Dean Schorno

No, we actually expect that to grow both in volume and in revenue growth from the 20% ranges you know, today. So (inaudible) it was both the test volume and in revenue growth. We’ve added a number of countries or partnerships over the last six months. They're just beginning to show traction and we're expecting even greater traction in the countries where we had been for a while. Things are getting better and reimbursements helping with that.

Amanda Murphy – William Blair

Got it. And are you pretty happy at this point with the infrastructure you have. So, I guess two questions there, one being the distributor in the direct sales you know, infrastructure you have built out as well as the I don’t know if you would consider building out from an actual bricks and mortar standpoint you know, outside the US.

Dean Schorno

You know, I think you know, as much as we talk about international and the great success we have had, it still only represents 10% of the total business but, you know, from nothing to 10% was terrific, but there is more direct investment to be made with success and reimbursement both in France and Germany and in UK we will need to add resources to take advantage of what success, even what we are seeing in Ireland and in the UK today.

So there will be more direct investment much of what you have heard about recently has been through partners but then we've been adding resources on a direct basis and we will have to add more to take advantage of any reimbursed success we have particularly in those countries. Even in Canada we got terrific success. We’ve been adding direct resources. So more to come.

Amanda Murphy – William Blair

All right. Thanks very much.

Kimberly Popovits

You're welcome.

Operator

Thank you. Our next question comes from Dan Leonard with Leerink Swann.

Dan Leonard – Leerink Swann

Thank you. Going forward at least in the near term should we expect that that gap between your test volume growth and your revenue growth is going to persist?

Dean Schorno

Yes, you should. The good news about that is the difference in those two growth rate is the success we are having in new markets and with new products, but over time as we have reimbursement success with DCIS and with colon private payers that could narrow, but I hope actually that expands because prostate is such a great success. So there is going to be this dynamic that we are just going to have to track together and keep each other well informed about. As we introduce new products there is a lag between reimbursement and that is what we are seeing today this 3% gap and we probably will see that for the foreseeable, you know, short-term at least.

Dan Leonard – Leerink Swann

Okay, thank you. And then my follow-up on InVitae, were there any asset transfer between Genomic Health and InVitae outside of the cash payment, and if there were can you help me better understand what that might look like?

Dean Schorno

Yes, the real assets of InVitae because we were just getting started hiring together the management team, putting the business plans in place is really the people and so there are you know, currently 4 internal people at Genomic Health involved in InVitae full time that will be transferring myself, Rick Tompane, we had hired out of the computer served industry, and a couple of additional hires, including a really top bio-informatics person, and then the InVitae just name and business plans et cetera. So all of that will be consolidated into the new entity.

Dan Leonard – Leerink Swann

Okay, thank you.

Operator

Thank you. Our next question comes from Kevin DeGeeter with Ladenburg Thalmann.

Kevin DeGeeter – Ladenburg Thalmann & Co.

Hi good afternoon guys. Congratulations on the progress and with the spin off of InVitae as well.

Kimberly Popovits

Thank you.

Kevin DeGeeter – Ladenburg Thalmann & Co.

Two questions, can you just give us updated thoughts on additional “development” work for DCIS, you know, some rough thoughts perhaps on some study parameters or timeline to you know, move forward with the second study for publication and then to maximize the reimbursement opportunity there.

Randal Scott

Yes, so with regard to the DCIS work again this is a case in DCIS we are – it's all about again making sure we have the right study population to give us information on the likelihood of local recurrence as well as an invasive recurrence. As you know our results from the ECOG Study, what's really being appreciated is that the DCIS score provided information both on the likelihood of invasive recurrence, but local recurrence as well.

In doing this we are actually there are some cases where you can actually go out and find that cohorts are already available and the tumors are already collected. In the case of DCIS which has been studied less extensively than invasive breast cancer, we are actually out there now doing the work and supporting the collection of the tumor tissue and the development of the cohort.

We will be very active in that work this year. I expect therefore to conduct a follow-on study next year to provide expanded information not only to provide additional information in the ER positive group, but you know, greater numbers to provide information in the broad population of DCIS patients.

Kimberly Popovits

Great. I also just want to highlight as well the biggest barrier to reimbursement today for DCIS is in the second study, as much as it is publication of the first study. So one of the milestones that you’ll see and we talked about earlier today is the publication of that study, which we hope to see in the near future. But we believe that given that DCIS is the same recurrence score in the Oncotype DX product that is so familiar in the marketplace and that's become standard of care that we ought to be able to move some payers along with that first publication of the first validation study, given that it was such a compelling study.

Kevin DeGeeter – Ladenburg Thalmann & Co.

Okay, terrific. Very helpful. Then maybe one follow-up question we are going to get Dean in here. I guess with the decision to structure the investment and next-generation sequencing through InVitae as a standalone entity here, you know, it changes the P&L somewhat and I guess brings the issue just in terms of reporting of tax into question here, maybe a little earlier, I guess the role that [Sam Levy wrote off] is two years of profitability, your accounts are going to want to you at least think about reporting taxes. Can you just give us your thoughts on tax and just remind us on a cash basis what your NOLs looks like…

Dean Schorno

Sure. And just one comment on InVitae, and InVitae is really about the genetics, our view of the genetics business and not about next-generation sequencing because next-generation sequencing while leveraged by InVitae is absolutely core and key to our continued cancer business. So the comment there. With respect to taxes you're right there is a point in time it's a pretty detailed technical accounting conversation, we won't get into here.

There is a point in time where you do have profitability where you free up your valuation allowance, now result in a big negative tax expense and thereafter will get to normalized rates. We haven't given a clarity of guidance of when that will occur but you're right, we are getting to the point where at some point in the future we could see that happening. Your question about the NOLs as of the end of last year it was about $105 million.

Kevin DeGeeter – Ladenburg Thalmann & Co.

Terrific. Thanks for the clarification.

Operator

Thank you. (Operator instructions) Our next question comes from Scott Gleason with Stephens.

Scott Gleason – Stephens Inc.

Kim, Brad, and Dean thanks for taking my questions.

Kimberly Popovits

You are welcome.

Scott Gleason – Stephens Inc.

I guess just first off can I ask, could you guys repeat the percent of sales and the percent of tests recognized on a accrual basis. I’m sorry I missed those.

Kimberly Popovits

Percent of sales and tests under accrual.

Dean Schorno

Sure, 59% accrual, 67% tests, and 67% accrual for revenue.

Scott Gleason – Stephens Inc.

Okay, thanks. And then I guess you know, Kim, we've seen some smaller I guess payer decisions on the colon side, but I haven't seen the [united]. I guess for the (inaudible) study published at this point I guess, you know, you can characterize you know, kind of how those conversations are progressing and kind of what your expectations are I guess for the second half of this year.

Kimberly Popovits

Scott, I will let Brad to address that.

Bradley Cole

Yes, thanks. You're right we've seen private pay success, but we haven't announced the big-name and I think this is just for the process. It takes time, it takes actually volume in those accounts to have the discussions and one publication is very interesting and a second publication will be even better. So we eagerly await to see [ELGB] publication results to know what the results of the study were. They were fantastic presented a year ago at ASCO. It is just – the publication is later this year or early in 2013. We will provide that additional valuable information will help in those conversations. So we'd expect in ’13 we’ll see more traction in the private pay world for the colon cancer test.

Scott Gleason – Stephens Inc.

Great, and then just last question real quick. You know, we’re hearing rumors that the IVDMIA tests are going to be up for I guess re-examination with new national coverage determinations next year. Are you guys certain where to kind of whether you’re going to be involved in that process or kind of what your expectations are there?

Kimberly Popovits

Oh yes, Kathy Hibbs is with us to address that.

Kathy Hibbs

Sure. So just a reminder, our test has never used a stat code system. We have always had an individual unique modifier that we have used. So what I think you are referring to is the AMA panel work as well as the MolDx program, which has been announced by Palmetto, who is our CMS carrier. We’ve had similar conversations with Palmetto as we've gone through and gotten coverage and reimbursement.

So really we view ourselves as being ahead of the curve with regards to already having established our reimbursement rate, and we would not expect our test to be targeted. That's one of the ones that is being looked at. That is focusing as you probably know first on those that have used stat codes and haven't had the individual reimbursement coverage decisions that we have actually had with both breast and colon at the CMS level through Palmetto.

Scott Gleason – Stephens Inc.

Okay. Thanks for taking my questions guys.

Kimberly Popovits

You're welcome.

Operator

Thank you. Our next question comes from Laura McGuigan with B. Riley.

Laura McGuigan – B. Riley

Good afternoon. Just a few questions, additional questions on the international side of the business, I know you mentioned some additional payer decisions for colon in the region but is it safe to assume those volumes today they are entirely be expressed and then additionally you are experiencing any lag in payments beyond what you would normally expect to see for the launch of a new test due to kind of the economic environment in the region, and would you expect that to be exacerbated as we go forward?

Dean Schorno

You know, the international business in colon is really just getting started. Our teams have to focus on the breast market there, and so any limited comments we made around reimbursement success in colon outside the United States is just that, it's very limited. So I don't have any real comment or sense of what the economic environment could be doing to that product line itself.

I know it’s challenging economic times in Europe, and I think that you know, maybe delayed some discussions with payers around the breast product, but nothing no real impact on colon at this point.

Laura McGuigan – B. Riley

No, sorry, I meant – to just to clarify I meant lag in payment in the international business in general. Sorry, that was kind of two separate questions. Just one is the express driving volumes in Europe and then additionally are you seeing any lag in payments?

Dean Schorno

We are seeing lag. You know, we are seeing lag. I don't know that I can connect it to the economic environment. There is just a process of understanding the health economics and the great benefits it has provided and get people getting their head around that. We've got private payers we previously announced in the UK coverage to private pay. We've got public and private pay in Ireland, for example, Ontario, Saskatchewan, other provinces in Canada. So it’s really you know, an individual conversation around each one of those but in any case when you get to that point there is lags in working through the system much like we saw in the US. We are getting details worked out, so that we can get paid. And that started to happen in Ireland and the UK even in this quarter.

Laura McGuigan – B. Riley

Okay, thank you guys.

Kimberly Popovits

You're welcome.

Operator

Thank you. Our next question comes from Nicholas Jansen with Raymond James.

Nicholas Jansen – Raymond James

Hi thanks. Most of my questions have been answered but specifically on let’s say the medical device tax, I think [we are] subject to that. So I was wondering if you had any comments surrounding A, the gross impact to you guys, and B, have you decided whether or not you will raise prices to offset that?

Kimberly Popovits

So the medical device tax applies to devices. We are a laboratory service and we don't actually sell a device. Of course because of the way that FDA has over the years of the dialog style there is comments about regulation of laboratory services. A concern has been raised as to whether the device tax would apply if we began being regulated as medical devices.

Efforts to clarify that have been made by trade associations such as the American Clinical Laboratory Association. There has not been a response but as we stand here now we do not believe we are covered by the device tax. Obviously we will be monitoring that and working on that if there is activity to either extend the tax to services or where to be any clarification that we might get through the trade association.

Nicholas Jansen – Raymond James

Okay, thanks. And then just lastly in terms of I know the Medicare clinical lab fee schedule is getting a pretty significant reimbursement reduction in 2013, including sequestration I was just wondering your exposure if you had any kind of rough assessment of that 5% cut on the impact on your revenue next year. Thanks and great quarter.

Kimberly Popovits

Thanks. Our tests have been paid through our medical carrier, which is Palmetto for us, and so we've not been on the national fee schedule. So we're not impacted by the up or the down currently in the fee schedule.

Okay, operator. No questions?

Operator

Thank you. And at this time I'm showing no further questions. I would like to turn the call back over to Ms. Popovits for closing remarks.

Kimberly Popovits

Great. Thank you for joining us today and for your interest in Genomic Health. We look forward to seeing you an upcoming investor conferences and medical meetings.

Operator

And this concludes today's second-quarter 2012 conference call for Genomic Health. You may now disconnect.

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

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

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

Source: Genomic Health's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts