Genomic Health's (GHDX) CEO Kim Popovits on Q2 2018 Results - Earnings Call Transcript
Genomic Health, Inc. (NASDAQ:GHDX) Q2 2018 Earnings Conference Call August 2, 2018 4:30 PM ET
Emily Faucette – Vice President of Corporate Communications and Investor Relations
Kim Popovits – Chairman of the Board, Chief Executive Officer and President
Brad Cole – Chief Financial Officer
Steve Shak – Chief Scientific Officer and Chief Medical Officer
Fred Pla – Chief Operating Officer
Mitch Petersen – Barclays
Tejas Savant – JPMorgan
Mark Massaro – Canaccord Genuity
Dan Leonard – Deutsche Bank
Good afternoon. My name is James, and I will be your conference operator today. At this time, I would like to welcome everyone to Genomic Health’s Second Quarter 2018 Financial Results Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions] As a reminder, this call is being recorded.
I would now like to turn the call over to Emily Faucette, Vice President of Corporate Communications and Investor Relations. You may begin your conference call.
Thank you. Good afternoon, everyone, and welcome to Genomic Health’s conference call to review our second quarter 2018 financial results. Please note, a copy of the prepared remarks we are about to make is available to download on the Investors section of our corporate website, genomichealth.com.
Before we begin, I’d like to remind you that various remarks that we make on this call are not historical, including those about our future financial and operating results; key drivers and expectations for revenue growth in 2018; demand for our tests and drivers of demand as well as correlations between test demand to present or future revenue; payer coverage, timing of revenues from payers and progress in reimbursement and patient access; clinical outcomes and the timing and impact of clinical studies and publications; our plans and prospects; our ability to leverage our existing commercial channel and infrastructure; the success and focus of our business strategy; economic benefit in the value of our tests; growth opportunities, including international expansion, future products, product launches and our product pipeline; effects of changes in the new ASC 606 accounting standard in comparison against prior periods; effects of foreign currency exchange rates; the new tax law; and expectations regarding potential FDA or other regulation tests.
These constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act. We refer you to our quarterly report on Form 10-Q for the period ended March 31, 2018, 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 today to make prepared remarks are Kim Popovits, our Chairman of the Board, Chief Executive Officer and President; Brad Cole, our Chief Financial Officer; and Steve Shak, our Chief Scientific Officer and Chief Medical Officer. Additionally, Fred Pla, our Chief Operating Officer, will be available during Q&A at the end of the call. I’ll now turn the call over to Kim.
Thanks, Emily. Good afternoon, everyone, and welcome. We delivered record results in the first half of 2018, including 14% revenue growth and $8.3 million profit on a GAAP basis and a $9.4 million profit on a non-GAAP basis in the second quarter. Importantly, we delivered our 12th consecutive quarter of improved non-GAAP profitability.
These strong results were driven by successful execution across our entire business; enhanced operational efficiency and greater leverage; strong reimbursement for the Oncotype DX Breast Recurrence Score test, including PAMA; and increasing private payer reimbursement for the Oncotype DX Genomic Prostate Score or GPS test.
We believe we will continue to accelerate adoption and reimbursement of our Oncotype IQ portfolio of proprietary tests with the recent achievement of key catalysts, including presentation and publication of the landmark TAILORx study results in early June. We anticipate these positive results will be transformative and increasing global adoption, reimbursement and penetration of the Oncotype DX Breast Recurrence Score. We are already seeing the impact of the TAILORx results in global invasive breast test volume following ASCO.
Additionally, both NICE in the UK and G-BA in Germany announced plans to incorporate TAILORx results as they prepare to make reimbursement decisions later this year and multiple private reimbursement decisions for the Oncotype DX GPS test, including a top five national payer. With these new policies in existing Medicare coverage, the total number of covered lives for the GPS test in the United States is now more than 92 million.
Additionally, we reached an important milestone in our Biocartis-IVD collaboration, demonstrating feasibility to perform the Oncotype DX Breast Recurrence Score test on the proprietary Idylla platform. We are now in the process of building the global infrastructure, including supply chain and technical and clinical support to enable rapid deployment of our IVD solution to increase access in Europe and other markets for localized testing that’s critical for adoption and reimbursement.
As part of these efforts, we are identifying early access sites to conduct validation studies and are making good progress with the European IVD regulatory requirements. We remain on track to launch the Oncotype DX IVD test in late ‘19, beginning with France and Germany. Based on this rapid progress, we are accelerating R&D feasibility studies with the goal of moving additional and future Oncotype DX tests to the Idylla platform to expand our international offering.
Separately, while we continue to actively develop our urology pipeline, we made a business decision to discontinue our early-stage development of the IsoPSA assay and terminate our milestone-based licensing agreement with the Cleveland Diagnostics group. As we look to expand our future growth for pipeline development, we continue to actively evaluate licensing, collaboration and acquisition opportunities to complement our internal R&D in driving leverage across our established oncology and neurology channels.
I’ll now turn the call over to Brad and Steve to provide further detail on our second quarter financial results as well as our worldwide commercial and clinical progress. Brad?
Thanks, Kim. We are very pleased with our second quarter financial results, during which, we’ve delivered double-digit revenue growth across all key product lines. As a reminder, effective January 1, 2018, we adopted the new ASC 606 accounting standard for revenue, using the modified retrospective method, which applies the new standard prospectively and does not impact prior year’s financial statements.
Since the as reported 2017 quarterly and annual financial statements will not be restated to reflect the new accounting standard, we have provided a supplemental financial schedule in the non-GAAP tables in our press release, reflecting an estimate of revenue as if the new standard had been applied as of January 1, 2017, which we will be refer to as pre-ASC 606 adjusted figures in our prepared comments.
In the second quarter of 2018, total revenue was $95.6 million, an increase of 14% compared to the pre-ASC 606 adjusted revenue of $83.8 million for the second quarter of 2017. On a constant currency basis, revenue increased 13%. For the six months ended June 30, 2018, total revenue was $188.2 million compared with pre-606 adjusted revenue of $166.1 million for the same period in 2017, an increase of 13%.
In the second quarter of 2018, we’ve delivered an $8.3 million profit, an improvement of $11 million compared with the same period in 2017. On a non-GAAP basis, profit was $9.4 million. These strong results marked our 12th consecutive quarter of improved profitability on a year-over-year non-GAAP basis. For the six months ended June 30, 2018, we delivered a $4.5 million profit, an improvement of $8 million. On a non-GAAP basis, profit was $14 million for the six months ended June 30, 2018.
We delivered more than 33,590 Oncotype test results in the second quarter of 2018, an increase of 6% compared to the same period in 2017. Revenue growth of 14% was driven about equally by test volume, up over 6%, and reimbursement improvements and collection efficiency, increasing realized average selling price by 8%. 85% of tests delivered and 93% of product revenues were recorded on an accrual basis in the second quarter of 2018.
I will now walk you through the results across each of our key product lines. U.S. invasive breast cancer revenue was $72.5 million in the second quarter of 2018, an increase of 13% compared to the pre-ASC 606 adjusted revenue for the same period in 2017. Revenue was up 12% for the 6 months ended June 30, 2018. This accelerated revenue growth in the second quarter was driven by increased test volume, resulting in revenue growth of 4% and contributing more than 30% of total growth; PAMA implementation, adding 3% to revenue growth and contributing approximately 20% of total growth; stronger ASP overall from private payers, the result of contract renewals and collection efficiency, contributing nearly 3% to growth and more than 30% of total growth; and the move to the new revenue standard positively impacting growth as well and contributing approximately 10% of total growth.
U.S. invasive breast cancer test volume increased 4% year-over-year for the quarter and 4% year-over-year for the six-month period. Early positive impact in June, following the presentation of TAILORx results, was reflected in strong test demand up 7% in June compared with May and up 7% compared with June of 2017.
International product revenue was $14.2 million in the second quarter of 2018, an increase of 11% compared to pre-ASC 606 adjusted revenue. On a constant currency basis, revenue grew 8% – grew 6%. International revenue increased 8% for the six-month period ended June 30, 2018. On a constant currency basis, revenue grew 4%.
The number of international tests delivered in the second quarter of 2018 was consistent with the same period in 2017 and represented approximately 23% of total test volume in the quarter. International test volume declined 3% for the six-month period ended June 30, 2018, compared to the same period in 2017.
Excluding Germany, where we changed the ordering model late last year to require a committed payment prior to accepting orders and the conclusion of certain studies which we provided tests, international volume was up 16% year-over-year in the second quarter. While these changes have impacted tests delivered as expected, we are beginning to see progress in both payer engagement and coverage contributing to this double-digit revenue growth.
Additionally, similar to the U.S., the TAILORx results have had an early impact internationally. Test demand was up 14% in June compared with May of 2018 and up 10% compared with June of 2017. Looking ahead, with these TAILORx results and anticipated reimbursement decisions in the UK and Germany later this year, we expect international revenue to continue to grow in double digits.
In U.S. prostate, we delivered record revenue for our GPS test of $6.7 million, an increase of 63%, which contributed more than 20% of total revenue growth in the quarter. This higher revenue was equally driven by higher test volume, which grew 32% and increased payments for qualified billable tests and coverage from private payers.
Oncotype DX GPS test volume growth was as expected with continued market leadership in low and intermediate-risk prostate cancer. We are starting to see an uptick in private coverage with more than 42 million U.S. private lives now covered in addition to the 50 million lives covered by Medicare. For the six months ended June 30, 2018, GPS revenue was up 72% and test delivery were up 29%. We continue to expect full year GPS revenue growth to be approximately 50% and test volume to be approximately 30% higher as originally planned.
While it’s still early, we are encouraged by the initial response to our launch of the Oncotype DX AR-V7 Nucleus Detect test and anticipate it will provide a more meaningful impact on both test and revenue growth following the finalization of the Medicare LCD, which we expect to occur in the third quarter.
Gross margin rate increased to 85% in the second quarter due to stronger average selling price for our U.S. invasive breast test and continued benefit of PAMA, stronger average selling price of revenue for our GPS test, our new international payment model and further operating efficiencies. Moving forward, we expect gross margin rate to be 84%, in line with our year-to-date gross margin rate.
Cash and cash equivalents and short-term marketable securities at June 30, 2018, were $152.9 million, an increase of $23.3 million from December 31, 2017. In the second quarter, non-GAAP adjusted EBITDA was $17.6 million. For the first six months of the year, non-GAAP adjusted EBITDA was $30.5 million, on track to exceed the more than $50 million for the year we expected.
Looking ahead at the remainder of the year, we reiterate our full year guidance. Specifically, in 2018, we are guiding to total revenue of between $366 million and $380 million, representing growth between 10% and 15% compared with 2017. Given our strong first half performance and revenue beat, we currently expect to deliver revenue at the higher end of revenue guidance for the year. As a reminder, the positive TAILORx results at ASCO were assumed in our $382 million revenue guidance.
Net income or profit between $14 million and $20 million on a non-GAAP basis, which excludes clinical and commercial development milestone expense and the first quarter realignment charge.
We’re very pleased with our first half results, including record revenue levels and continued operating leverage, having delivered our 12th consecutive quarter of improved non-GAAP operating results. Based on this strong performance, we expect the Street will raise revenue and non-GAAP net income projections and are comfortable with the high end of both our revenue and income guidance ranges.
As a reminder, to achieve the high end of our revenue guidance, we must deliver U.S. invasive breast revenue growth of greater than 10%, contributing to over 50% of expected growth for the year; prostate GPS revenue growth of approximately 50% and increasing reimbursement from private payers, contributing approximately 20% of expected revenue growth for the year; improved revenue growth in international markets with expanded test volume globally and reimbursement coverage in Western Europe, contributing approximately 20% of expected revenue growth for the year; and a fourth quarter contribution from the Oncotype DX AR-V7 Nucleus Detect test.
As planned in the second half of the year, we anticipate increased spend associated with the ramp-up of our IVD chronic development and business process enhancements globally. We remain committed and well-positioned to deliver double-digit revenue growth and continued improvement in profitability in 2018.
I will now turn the call over to Steve to discuss one of our key growth drivers, the recent TAILORx results.
Thanks, Brad. June 3 marked the day that we and thousands of physicians and hundreds of thousands of breast cancer patients around the world had been waiting for with the reporting of a positive TAILORx results, assessing the effective chemotherapy in women with early-stage breast cancer and Oncotype DX Breast Recurrence Score results of 11 to 25.
In meeting its primary endpoint, this study presented in the plenary session at ASCO and simultaneously published in the New England Journal of Medicine, provides the highest level of clinical evidence for Oncotype DX. With these results, physicians can now tell every patient with precision what their magnitude of chemotherapy benefit will be.
Before I review the TAILORx results in detail, on behalf of all of us at Genomic Health, I want to thank the thousands of people around the world who made this landmark study possible, especially the 10,273 patients whose selfless participation enables a new global standard of care in breast cancer diagnosis and treatment.
As a reminder, the TAILORx trial was independently designed and led by ECOG-ACRIN under the sponsorship of the National Cancer Institute or NCI. It is the largest breast cancer treatment trial ever conducted and thousands of investigators enrolled more than 10,000 women across approximately 1,200 sites in six countries. All five adult cancer research group in the NCI’s network enrolled patients and leading breast cancer efficacy organizations, including the Breast Cancer Research Foundation, Susan G. Komen and the National Breast Cancer Coalition supported the trial.
TAILORx provides the most definitive answer about how to treat women with early-stage breast cancer using the Oncotype DX test. These Phase III trial results provide an unprecedented level of precision supporting the use of the test to guide adjuvant chemotherapy used in this population, which accounts for about 1/2 of all breast cancers.
With regard to the primary endpoint, TAILORx enrolled approximately 7,000 women with Oncotype Breast Recurrence Score results of 11 to 25. This primary study group was randomized to receive a monotherapy with or without chemotherapy in order to more precisely define the benefit of chemotherapy, if any. These randomized patients with Recurrence Score results of 11 to 25 comprised approximately 2/3 of all TAILORx patients and were followed long term with nine-year outcomes reported. This group of women represents approximately 260,000 breast cancer patients diagnosed in major global markets each year.
The TAILORx study definitively established that chemotherapy can be spared in least 70% of patients. The relationship between the Recurrence Score result and chemotherapy benefit is clear. Tumor size or tumor grade did not predict chemotherapy benefit, proving that the biology revealed by the Recurrence Score is essential in determining chemotherapy benefit.
Thus, the unique TAILORx trial has established that chemotherapy treatment should be guided by the Recurrence Score result. Only the Oncotype DX test finds the patients with high Recurrence Scores who should be treated with chemotherapy to prevent distant recurrences and the patients with low recurrence scores who can safely avoid chemotherapy.
Media coverage of the TAILORx results was extraordinary, with compelling quotes from highly regarded key opinion leaders and efficacy groups around the world. The broad media dissemination of these practice-changing results, including key countries where there remain significant opportunity for increasing patient access, inspired a positive global reaction.
We are also encouraged by the continuing flow of information and interest in the TAILORx results, including a positive editorial published in the New England Journal of Medicine last month, continued media coverage in the United States and Europe and a record number of educational sessions hosted by our medical team and thought leaders around the world in June and July to educate physicians as they appropriately apply these landmark results to clinical practice.
We, along with key opinion leaders, believe the significant TAILORx results warrant immediate review and inclusion in clinical guidelines. As Dr. William Gradishar, an oncologist at Northwestern University and Chair of the NCCN Cancer Treatment Guidelines Committee, has stated, "Clearly, this is a landmark study. I think it will cause some changes in the guideline language."
As a reminder, TAILORx, as well as the completed NSAPB B-20 and the SWOG-8814 Oncotype DX studies are unparalleled in their specific design to formally identify those patients who benefit from chemotherapy as well as those who do not, using randomization to treatment. While other prospective trials have looked at prognosis, TAILORx was uniquely designed to answer the most important question regarding the prediction of chemotherapy benefit.
Large randomized clinical trials like TAILORx provide a gold standard of clinical evidence and come along once in a decade at best. We are proud that Oncotype DX is the only genomic test to have been studied in such depth and believe that it will be uniquely indispensable to clinical practice moving forward.
I’ll now turn the call back over to Kim.
Thanks, Steve. Through effective execution across our entire business and publication of the practice-changing TAILORx results, the first half of 2018 was critical to both our short and long-term growth. As we look ahead, we believe we are well positioned to drive further adoption and reimbursement of our portfolio globally. Importantly, we are on track to deliver double-digit revenue growth and a full year of profitability.
Our remaining 2018 priorities include leveraging the strong prospective evidence that TAILORx provided to encourage more clinicians to use the Oncotype DX Breast Test for all eligible patients worldwide, driving further adoption of the Oncotype DX GPS test while leveraging a full year of CMS intermediate-risk coverage and expanding private reimbursement and furthering reinvestment success in large European markets for our invasive breast cancer test.
We are on a path to deliver both near-term growth and profitability while continuing to develop and deliver high-value tests that improve treatment decisions and outcomes for cancer patients around the world. I’d now like to open the line for questions.
Thank you. [Operator Instructions] Our first question comes from Jack Meehan with Barclays. Your line is now open.
Thanks. This is actually Mitch Petersen on for Jack. I was hoping you could touch on just the benefits that you saw in June with regard to TAILORx. Is that the right level of benefit that we should expect going forward? Have you seen an acceleration end of July? And how sustainable do you think these benefits are going to be longer term?
Yes. I’ll start and maybe Brad can jump in, but – this is Kim. We certainly saw a momentum in June post ASCO and in fact, saw it very quickly. As you can imagine, the headline is coming out of ASCO. And while we’re at ASCO, we’re quite extraordinary, indicating the practice-changing impact of these results. So we were quite pleased. As a reminder, we factored into our guidance that we would get a positive TAILORx result, and we’re monitoring it closely.
I would add that heading into July, we’re also pleased with the momentum. And we will continue to work on changing practice guidelines and driving this into clinical practice around the globe. And we’re especially, I think, pleased to see some of the movement from large markets in Western Europe where we know that the data is going to be incorporated with some really important upcoming national reimbursement decisions. So stay tuned on that.
Yes. Just as a follow-up, maybe going off that. If you could just elaborate more on the timing with the UK and Germany and then if you could help us just frame the opportunity with those two countries. And maybe just expanding on that, if you look at your international volumes with breast today, what percentage of them are reimbursed for it today? And if you get coverage from Germany and UK, where do you think that goes to in 2019?
So I’ll ask Fred to jump in on some of the – actually where the potential is. But as we look to where we are today, we are getting coverage in the UK. The UK coverage is just under review now by NICE for an extension. So that does not change, although we think that it will be stronger with the TAILORx results incorporated. With Germany, they have publicly stated that they were awaiting the TAILORx results to make a decision. And then their past review had commented that the only test that they would consider would be Oncotype DX with the TAILORx study completed.
So that study is now in their hands. And we don’t know the exact timing, but we’d expect that to be a 2018 event, could be later this year for 2019 coverage. And likewise, we are seeing progress in other markets like France and Italy. And in terms of around the...
I think you’re trying to get a read on what percent of our international tests are covered. Majority of them are covered, but it’s a really complicated answer to go into. But clearly, we don’t have the biggest coverage in some of the biggest markets in Western Europe, which is the common index, 6 to 12 months. Some of the coverage, other place of the world are two partners and they’re still not as broad a coverage as we like. So over time, this could turn into more broad probably coverage in places in South America and other places. But through partners, we get paid today many times such as Japan. That’s a [indiscernible] patient pay market, so there’s a big upside. We’re only 10% penetrated in our key markets.
Got it, that’s helpful. And then if I could just squeeze in one last one. Could you just remind me how many commercial lives you added for prostate in the quarter, if these go into effect immediately? And then in light of maybe some seasonality in the third quarter, if you expect another quarter of sequential growth there. Thanks.
Well, in the quarter, it was about 10 million lives.
And its 92 million...
Total overall now.
And just under 33 million a year in terms of covered lives. So more to come.
Thank you. Our next question comes from Tycho Peterson with JPMorgan. Your line is now open.
Hey, guys. This is Tejas on for Tycho. Just wanted to get your sense, Kim, on the dynamic. You mentioned earlier about having baked TAILORx already into your 2018 outlook. I mean, is there just sort of conservatism around the time lines of where the guidelines change and how long it takes for reimbursement to fall in place after that in the UK and Germany? Or specifically, I mean, have you already assumed a pretty significant uplift in your international covered volumes as well.
Yes. So we did assume an uplift, both in the U.S. and in international related to the results. Now the question is, where do guideline committees and review committees go post this. I think we can all say the results were – maybe exceeded our expectations. And so we’re looking at the momentum that we have in hand in some of these upcoming decisions. So it really is a bit of a stay tuned in terms of how we see that growth coming and over what time frame. But we really do believe that this is practice-changing, and it is very explicit that we can individually predict the magnitude – the benefit of chemotherapy for every breast cancer patient looking to make that treatment decision.
Yes, this is Steve. Maybe also just jumping in what we’re seeing already in June and July and what you can expect with a study of this magnitude. Over the next 12 to 24 months, at every cancer meeting and certainly big and small, a topic will be what’s new in terms of breast cancer diagnosis and treatment. And for example, there’s already been a meeting in Israel that convened all of the medical oncologists in the country to review the TAILORx results with one of the investigators there. So this is the kind of activity that causes us, again, to look at the increase in access and the increase in reimbursement and see that going out now over the next, certainly six months, but then probably much more into 2019 as well.
And just as maybe a bit of a barometer in the U.S., we would expect that we would hear from NCCN and ASCO in the next few months or so. And then those new guidelines would need to be put into place. But we don’t think that, that is a long-term event. We think it will be in the near term that both guideline committees will be making a new recommendation.
And as it relates to guidance, I think we were trying to tell you the guidance – just want to clarify that most of these reimbursement decisions that we’re talking about or the upgrade in guidelines really have an impact post 2018. So it sounds like we have to get these to deliver our numbers. But these are great conversations, they’re really important decisions. But they’re going to have – the nice thing is they’re gonna have a positive impact mid or long term on our business.
Well, into your earlier point, they represent the largest market opportunities we have right now in Western Europe. So while we think it will settle out by year-end, the revenue impact will be in 2019. But a nice growth trajectory going – leaving this year.
Got it. And then, Kim, can you just share some of the thought process behind pulling the plug on the IsoPSA development collaboration? Was that just sort of a strategic decision? Or was it more of a technical hurdle where you could have – that your research dollars were better invested out there?
A little bit of both. But let me ask Fred to address that.
Yes. Now this is Fred here. This was a business decision that was based on our internal review process, and then some of the criteria that we have in place for how we advance early-stage product through the development process. So we still continue to actively develop our urology pipeline, but that’s the decision we took this quarter.
Got it. And then one final one here for me, for Emily perhaps. Can you just give us an update on your direct marketing campaign? Just thoughts on the reception so far, especially among sort of nonusers of the test or folks who are sort of more likely to prescribe chemotherapy. I mean, are you seeing any traction there? And in terms of your committed payment programs that you have in place in Europe, I mean, how are you thinking of perhaps sort of scaling those back a little bit following these results? Or was it still too early to kind of think about that?
Sure. I’d be happy to talk to you about kind of the impact in the marketing that we’re doing to patients. Obviously, with the tremendous media coverage that we saw coming out of ASCO, we had a great opportunity to reach patients and physicians alike around the world with these compelling results. And so that was really helpful in setting the stage. And as Steve mentioned, our team here medically have been working very closely with key opinion leaders and thought leaders to educate more and more physicians around the world as they begin to apply these practice-changing results to clinical practice.
We’re also looking at kind of our marketing efforts to patients who have all now heard about these results and are taking a very kind of deliberate and targeted approach online. We know that’s a really effective way to reach both physicians and patients. And we have a data where we can go and look at where are markets where we are significantly underpenetrated and where can we focus those resources and efforts to reach those patients. And I’ve already started to see some physicians who have been dabbling and using other tests, start to use Oncotype DX more regularly as a result of the presentation. So early days, but all very positive and encouraging as indicated by what we saw by the June performance.
And I’d just add that you can imagine, we will be shifting additional resources into this whole area of digital in these targeted markets as we see the impact that they’re having and the impact of the educational work that Emily and her team are doing.
Perfect. Thanks so much guys for all the color. Appreciate it.
Thank you. [Operator Instructions] Our next question comes from Mark Massaro with Canaccord Genuity. Your line is now open.
Hey, guys. Thank you for taking the question and congratulations on the significant beat on the top and the bottom line. I guess, I wanted to start with the bottom line performance. The $8.3 million of net income is the highest level, I think, we’ve seen in the company for an awfully long time, maybe ever. So I wanted to just get some perspective, I guess, on spending in the back half for the year.
Looking at the net income guidance, which is maintained for 0 to $5 million on a GAAP basis, you’re already at $4.5 million through the first half of the year on a GAAP basis. The midpoint would imply $2.5 million. So I guess, the question is probably for Brad on how we should be thinking about accelerating revenue in the back half, probably meeting, accelerating levels of spend. So if you could just maybe comment on operating expenses in the back half of the year, that would be helpful.
Well, I couldn’t have said it any better, Mark. You teed it up perfect. You’re making all the right observations. Let me just first say something about Q2 as you noticed the significant beat. We were guiding to a quarter – in Q2 similar to Q1 and obviously, the revenue came in better. ASCO results were terrific, so revenue was higher. And we would – expected something well above the $4 million, and we did deliver well above the $4 million. So that was pretty much in line, driven really by revenues, so spending maybe a little bit light in Q2, but basically, mostly line with expectations.
You’re right to observe that revenue comes in at the high end, which we have high confidence in that we will be spending on the back half of the year at a higher rate than we just spent in this quarter. And that really is tied to IVD platform development and all the business system processes and infrastructure to prepare for the launch next year in Western Europe of our IVD platform. So there will be an increased spend in the back half of the year. Now to your comment on GAAP, we really encourage you to focus on non-GAAP net income. The GAAP net income has a lot of things that go into it, even mark-to-market changes from some of our investments, milestone payments which are variable.
So if you just look at that, this observation could be similar that we’re near the bottom end of the guidance already through the first six months. So it does require accelerated spend in the back half of the year, the back half of the year towards these targeted programs that we think are strategically important.
Great, that’s helpful. The top five payer win in prostate, certainly a nice addition, taking your total prostate lives to 92 million. Do you think there’s a chance that, that win can expedite other payers to follow suit given that there’s still some large payers out there that have not agreed to cover the test?
I think you’re right about that. I mean, this has been the pattern of the past number of years. It takes a few people and a few more people and then there’s – it’s a competitive market that you cover these types of assays. And so it’s hard to predict the timing of it, but we do think it’s already putting pressure on others to join the game. [indiscernible] probably the comment on this, the guidelines do not [indiscernible] payers.
Yes. That’s – the payer movement is now all following the NCCN recommendation. So that’s really important.
And it could take time, but now you’ve got a hard guideline out there.
Yes. And just for clarification, I think Kim, you had indicated that you had expected at least one payer to come on in prostate. Looks like you got it. Should we expect another one to come on this year?
I think I said the timing is hard to predict, but go ahead, Kim.
But I would – the timing is hard to predict, but I think we would say, yes, we would expect more movement in the private side between now and the end of the year.
Great. And then certainly, congratulations on the TAILORx data. You had commented about the accelerated uptake, both in June, U.S. and o U.S. Dovetailing on an earlier question on the call, I think some of us are trying to understand if the inflection is – maybe the perception in the marketplace is while this data is so compelling, let’s start ordering. But I think there’s maybe some concerns about excitement in June, July, August and then maybe having it fall off. So do you have any data points qualitatively perhaps that would suggest that this is going to be a longer-term increase in market penetration as opposed to a bolus of ordering activity right after the data?
Our expectation would be that it is a longer term and slower climb. So while we definitely saw momentum post ASCO in June and it’s carrying into July, we think the changes in practice guidelines and our ability to get this education out is going to be really important. Because imagine we’re – the market now that we’re trying to reach is the market that is not our believers and those using the test all the time. It’s those that are using the test some of the time.
And getting to those physicians, with the right educational material, with the target digital campaigns that we’re using that Emily mentioned, will be critical. That work has not been done yet. So we see tremendous upside here in terms of being able to drive penetration. We don’t see it as a hockey stick. We see it as a bit more of a marathon. But getting from where we are today, which is maybe 58%, 60% penetrated, there’s a lot of room for growth here in the U.S. And then as Brad mentioned earlier, with penetration outside the U.S. being less than 15%, there’s a tremendous amount of growth there.
That doesn’t even take into account our ability to access markets that we’re not even including such as China and larger markets that we’ll be able to access with the success of the IVD program that we have. So we really feel that the U.S. is absolutely a near-term growth opportunity, x U.S. is a much greater growth opportunity as we move to a national reimbursement. And then beyond that, we have markets that we’ve not yet even taken a shot at because of the inability to export tissue or where we don’t have a localized solution, which we will have in 2019. So we really think we have a nicely staged plan for continued growth over the next several years with a very large market opportunity.
That’s great. And then one last one for Brad. You expect to hit the high end of your revenue guide for 2018. You did maintain the net income GAAP and non-GAAP earnings guide for the year. I think I heard you say that you think you’ll exceed more than $50 million on EBITDA – adjusted EBITDA for the year. Just for clarification, are you raising your adjusted EBITDA target for the year or just saying that you are feeling comfortable that you will exceed it?
The greater than $50 million is what we’ve been seeing since early in the year when we gave our first investor relations kind of pitch at JPMorgan. So we believe that this year, we’ll improve profitability, improve cash flow and we’re certainly tracking at above $50 million, which is the guidance we gave. No change. It’s not part of the guidance, of course, but it’s certainly what we talked about. And it’s not a change upward, it’s a reiterization.
It was greater than $50 million to begin with.
Yes, so no change.
Okay, thanks. Thank you so much guys, good job.
Thank you. Our next question comes from Dan Leonard with Deutsche Bank. Your line is now open.
Thank you. Just a question for Steve. Steve, you brought up the New England Journal editorial on TAILORx. And I actually thought the punchline of that article was that there was more work to be done to improve a lot of breast cancer patients. So can you speak to what plans you have to use the biorepository or any other future market development efforts to continue to contribute there?
Yes. So in terms of the additional things that we see going on with regard to TAILORx, I know, for example – again, it’s an independent study – that there’s likely, at the European Society for Molecular Oncology meeting later this year, to be talks and presentations about this. The other thing that I know that I’ve heard a lot of people are very excited about in terms of future research is, as you know, with TAILORx now, it’s very clear with a high Recurrence Score of – despite chemotherapy, there was just a distant recurrence rate at nine years of 13%.
So for example, those patients are still not getting enough benefit even though the Recurrence Score directs them to get chemotherapy. And so we’re hearing that there’s likely to be, for example, in terms of further study for adjuvant patients, perhaps studies that will now look at using the Recurrence Score to identify patients with high Recurrence Score who might, for example, get a CDK-46 inhibitor and those kinds of studies. Whether the biospecimen repository might help in finding markers for those new drugs, markers for drugs that might be useful in immuno-oncology, that’s another possibility for the longer term. But clearly, in terms of the impact on clinical practice today, it was great to see in the editorial David Stern’s – Dr. Stern’s highlighting how clear and definitive the TAILORx results were in defining chemotherapy benefit, again, for all patients who have a Recurrence Score from zero all the way up to 100.
Okay, thank you.
Thank you. We will now conclude the Q&A portion of our call. At this time, I would now like to turn the call back over to Kim Popovits.
Thanks, and thanks for joining us today, for your interest in Genomic Health as always. We look forward to seeing you at some of the upcoming investor conferences. Enjoy your summer.
And this concludes today’s Second Quarter 2018 Financial Results Conference Call for Genomic Health. You may now disconnect.
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