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Genomic Health Attributes Q3 Revenue Growth to Strong International Test Adoption

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Genomic Health this week credited the continued expansion of its international business as a significant contributor to the double-digit revenue it reported in the third quarter.

For the three months ended Sept. 30, Genomic Health's revenues jumped to $59 million from $52 million in the third quarter of 2011. Product revenues increased 13 percent, to $58 million from $52 million a year ago.

Third-quarter revenues fell short of Wall Street consensus estimates of $60 million, however. And weaker-than-expected testing volumes sent the company's shares plunging 17 percent the day after it reported its earnings, to close at $26.42.

Genomic Health delivered 18,030 Oncotype Dx test results in the quarter, compared to around 16,890 test results a year ago. However, test volume was lower than it was in the second quarter of this year, when it delivered 19,020 test results, and missed analyst Q3 estimates of more than 19,000 tests.

During a call to discuss the third-quarter financial results, Bradley Cole, Genomic Health's chief operating officer, attributed the apparent slowdown to a number of factors, including "one less selling day in the quarter," lower test volumes in invasive breast cancer, fewer patients visiting doctors during the summer months, and, "to a lesser extent, increased competitive activity."

Based on these trends, Genomic Health lowered its full-year guidance for test volume from a midpoint of 76,000 test results delivered to 74,000.

Although test volumes may have been down in the US, the international markets made up for it, where test volume increased by approximately 30 percent. "Looking ahead, we continue to expect international revenues to be a significant contributor to overall product revenue growth," Cole said.

International product revenues were $8 million for the quarter, comprising 14 percent of total product revenues and representing a 60 percent increase over the year-ago period.

According to Cole, this growth in ex-US product revenues was driven by strong reimbursement and "particularly by strong cash revenue" from a variety of countries.

During the third quarter, Genomic Health continued to strengthen the reimbursement position for its Oncotype DX breast cancer test by inking coverage deals in France, Greece, Kuwait, and Spain. The total number of covered lives for the test is more than 90 million, which is around 33 percent of total US lives covered for Oncotype DX among patients with node-negative breast cancer.

Genomic Health's third-quarter R&D spending grew by 28 percent to $12 million from nearly $10 million a year ago. The company also increased its SG&A spending by 11 percent to $34 million from around $30 million a year ago.

The company posted a profit of $3.7 million in the third quarter, a bump up from $3.2 million in the prior-year period. Genomic Health ended the quarter with $58 million in cash and cash equivalents and $68 million in short-term marketable securities.

Growth Areas

Near-term growth areas for the Oncotype DX test franchise are in the ductal carcinoma in situ and colon cancer markets, officials said.

Genomic Health had hoped to have already published a validation study showing that the Oncotype DX test can gauge which patients are at high risk of DCIS recurrence and need radiation and surgery, or if they are at low risk and can do well with just surgery. Until this study is published, DCIS test adoption will be hindered, company officials acknowledged.

"Publication [of the DCIS study] is going to be key to increasing our traction with reimbursement for DCIS. And unfortunately, we had expected that we would have had that by this point in 2012, and that's been a material impediment, material impact on getting DCIS moving," Kim Popovits, Genomic Health CEO, said during the call. "So, with the expectation that we would have that very near term, we think that's a key driver for 2013."

For the Oncotype DX colon cancer test, Genomic Health signed a deal with NewBridge Pharmaceuticals to market it alongside its breast cancer recurrence test in Africa, the Middle East, and surrounding areas. Genomic Health is hoping to publish a second validation study for this test next year that will bolster its reimbursement prospects.

At the American Society of Clinical Oncology's annual meeting this year, Genomic Health reported data from two studies showing that the colon cancer test can predict recurrence risk in patients with Stage II and Stage III disease. "Separately, in a new exploratory analysis of over 700 candidate genes in this cohort, we have identified 16 genes strongly associated with the prediction of oxaliplatin treatment benefit," Cole said.

In the quarter, Genomic Health inked three state Medicaid contracts for Oncotype DX in gauging recurrence in node-negative breast cancer patients, in node-positive breast cancer patients, and for Stage II colon cancer patients. Cole noted that there is still significant market opportunity left for Oncotype DX in invasive breast cancer and said that the company's sales teams are focusing on driving test use in areas of the US where adoption is low.

The company estimates that two out of five women "aren't getting access to the Oncotype DX test," and Cole said that the sales force is "focused on reaching those areas of the country that are well below the average penetration rate of 60 percent."

Additionally, Genomic Health is planning to present clinical trial data at the San Antonio Breast Cancer Symposium in December, and focus on physician education and patient awareness efforts, in order to increase test use in this regard.

The next biggest revenue opportunity for Genomic Health will be its prostate cancer test. Aiming for a 2013 launch, the company is developing the multi-gene Oncotype DX prostate cancer test as a tool to gauge which early-stage prostate cancer patients have aggressive disease, and therefore require surgery, and which patients have indolent disease and should be closely monitored.

"We leveraged our expertise with the Oncotype DX breast and colon cancer to complete a rigorous development process, including six feasibility and development studies," Steve Shak, chief medical officer of Genomic Health, said during the earnings call.

Shak highlighted that the prostate cancer test will require much less tissue, more than 20-fold less compared to the breast and colon cancer tests. He further noted that prostate cancer is a multi-focal disease and there can be tumor tissue in various parts of the prostate with different molecular characteristics. As a result, Genomic Health is working with the Cleveland Clinic on a 700-patient study to identify "optimal genes that would predict aggressive prostate cancer in different parts of the tumor," Shak said.

"Finally, we've observed in the development and the validation studies that multiple biological pathways, in addition to the established role of cell proliferation, are important in the prediction of prostate cancer aggressiveness as defined by clinical recurrence and adverse pathology," he said.

According to Popovits, half of the 240,000 men currently diagnosed with prostate cancer in the US, or approximately 120,000 annually, will be eligible for the Oncotype DX prostate genomic score. Genomic Health estimates that the global market opportunity for its Oncotype DX breast, colon, and prostate cancer franchise will be around $3.5 billion.

Reimbursement

Although Genomic Health has been successful in garnering reimbursement for its tests, the molecular diagnostics industry as a whole has been closely watching the changing policies at the Centers for Medicare & Medicaid Services with regard to such tests. Genomic Health officials felt it was positive that CMS recently announced it would reimburse and establish pricing for molecular diagnostics described by new current procedural terminology codes issued by the American Medical Association under its laboratory services pathway.

Earlier this month, CMS issued a final rule stating that "molecular pathology CPT codes describe clinical diagnostic laboratory tests," and as such they should be paid under its Clinical Lab Fee Schedule, and not through its Physician Fee Schedule, the process by which doctors' services are reimbursed and priced. "While we recognize that these tests may be furnished by a physician … we are not convinced that all these tests ordinarily require interpretation by a physician," CMS said.

The process of deciding whether to reimburse genetic tests through the CLFS or PFS has been a contentious one, with physician groups and the lab industry taking markedly different stances. Most labs are concerned that reimbursement will be negatively impacted if tests are placed in the PFS, while physicians and pathologists believe that they won't be appropriately compensated for interpreting complex diagnostics if such tests are placed in the CLFS.

Genomic Health's Oncotype DX tests are not included in the 100 or so CPT codes for genetic tests issued by the AMA. Oncotype DX is considered a multi-analyte algorithm-based assay, or MAAA. Although the AMA has put in place a separate process for companies to receive MAAA-specific CPT codes, most developers of such tests haven't applied for such codes.

In its final rule, CMS restricted its decision to the genetic test codes that go into effect in 2013, and did not comment on MAAAs. This means that tests such as Oncotype DX can continue to be billed to payors as they have been, using "miscellaneous" or "unlisted" CPT codes.

An earlier document from CMS describing its stance on MAAAs had raised concern among industry players. A few months ago, CMS had indicated that MAAAs don't fit the agency's traditional definition of diagnostics performed at laboratories, since they use a mathematical formula to analyze multiple markers associated with patients' risk for disease or their need for particular healthcare interventions. MAAAs are considered to be "boutique" tests since they are performed at a single laboratory, which owns the algorithm. After analyzing patients' biological samples using MAAAs, these labs report a composite score or result, and don't break out the presence of individual markers in test reports.

"Medicare does not recognize a calculated or algorithmically derived rate or result as a clinical laboratory test since the calculated or algorithmically derived rate or result alone does not indicate the presence or absence of a substance or organism in the body," CMS stated in that earlier document. "Medicare uses other codes for payment of the underlying clinical laboratory tests on which the MAAA is done and we continue to recommend not separately pricing the MAAAs codes."

However, CMS's latest ruling appears to have eased some tensions.

"I think it's important to note that in the final determination, CMS clarified that their decision was specific to the new CPT codes… [and] did not go beyond that," Kathy Hibbs, general counsel at Genomic Health, said during the earnings call. "[CMS] also reiterated that labs, such as ours … [should] continue to bill [tests] …as we have in the past. They deleted the language that … caused confusion because it implied that, for some reason, CMS did not recognize or could not pay for tests which contained algorithms."

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