A few months after announcing plans to launch a clinical genetics subsidiary, Genomic Health has decided to take a more cautious approach by spinning out the division, taking a minority stake in the independent firm, and keeping the option to increase its investment if the business succeeds in the future.
In February, Genomic Health formed a subsidiary called InVitae that was focused on providing genomic services related to common and rare genetic conditions (PGx Reporter 2/8/2012). At the time, with the InVitae division, company officials had hoped to "build on the success of Genomic Health and … leverage the company's infrastructure" without "divert[ing] resources from [its] core mission in cancer."
Last week, the company said it now plans to transfer InVitae's assets to Locus Development, one of two privately held firms in which it invested $2.8 million in early 2011. The new entity, called InVitae, will operate as an independent firm, though Genomic Health will continue to hold a minority stake in the new company.
Genomic Health plans to invest $5 million in InVitae's Series C financing round, giving it a less than 20 percent stake in the company. CEO Kim Popovits noted last week during a call to discuss Genomic Health's second-quarter earnings that under the terms of the InVitae transaction, Genomic Health will have the right to further increase its investment in future financing rounds.
As a Genomic Health subsidiary, InVitae was slated to be established as of March 1. However, now, in deciding to hand off the entity to Locus, InVitae will likely begin providing commercial genetic testing services starting next year, Genomic Health officials said.
This strategy to spin out InVitae appears to have evolved out of a desire at Genomic Health to optimize available resources and use them mainly to advance its main business: cancer diagnostics. "Over the past month … we have recognized an increasing distinction from our core business in cancer, and at the same time identified meaningful synergies with Locus," Popovits said during the call. Combining InVitae with Locus "allows us to continue to substantially fund and further our business interest in genetics, while continuing to focus our efforts on our core mission in cancer." Genomic Health estimates the global opportunity in cancer diagnosis — including breast, colon, and prostate cancers — to be $3.5 billion.
Although Genomic Health recorded a profit of $1.8 million for the second quarter, this was lower than the $2.3 million it netted during the second quarter of 2011. Excluding the $800,000 quarterly loss associated with the InVitae subsidiary, net income would have been about $2.6 million.
As a result of the spinout, previously planned losses of $20 million related to the subsidiary will be removed from the company's books going forward.
During the quarterly earnings call, Genomic Health officials declined to provide specific details about the InVitae/Locus merger. However, Popovits noted that Locus is currently beta testing its first targeted genetics products, which are slated for commercial launch in 2013. The combined firm's offerings will expand to whole-genome sequencing and offer comprehensive genome management services for physicians and patients, she added.
Randy Scott, who was previously heading up the InVitae subsidiary, will now serve as the CEO and chair of the new entity's board.
Other Focus Areas
During the call, Genomic Health officials also discussed plans to advance the company's clinical development program for a prostate cancer test – its next big diagnostic opportunity. In addition, the firm outlined plans to launch clinical applications based on a next-generation sequencing platform as well as its strategy for expanding its business internationally.
"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 [ductal carcinoma in situ] publication [for] reimbursement, reporting top-line results from our prostate cancer clinical validation study, and conducting a cooperative group clinical study using next-generation sequencing," Popovits said during the call.
Genomic Health began marketing the Oncotype DX test to DCIS patients at the end of 2011. The test helps doctors determine patients' risk for DCIS recurrence, and whether they can be treated with surgery in the case of low risk patients or if they need radiation and surgery for high risk patients.
The company is hoping to publish a clinical validation study for Oncotype DX in the DCIS population in a peer-reviewed journal at the end of 2012 or in early 2013. Genomic Health will also present data from two Oncotype DX studies -- one involving the DCIS population and another involving invasive breast cancer patients -- at an upcoming medical conference hosted by the American Society of Clinical Oncology in September.
Genomic Health Chief Operating Officer Bradley Cole said during the call that the company has initiated a clinical validation study for the Oncotype DX prostate cancer test. The study will determine if the multi-gene test can distinguish which early-stage prostate cancer patients have aggressive disease, and therefore require aggressive treatment, such as surgery, and which patients have indolent disease and should be closely monitored. Genomic Health plans to announce top-line results from this study later in the year and is aiming to launch an Oncotype DX prostate cancer diagnostic next year.
Steve Shak, Genomic Health's chief medical officer, estimated that approximately 200,000 men are diagnosed with prostate cancer each year in the US. "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," he said. "There are a number of those men that might be eligible for active surveillance, and therefore avoid those complications."
If the results from this large validation study are positive, Genomic Health expects to further invest in the development program for the prostate cancer test.
During the second quarter, Genomic Health's volume of test sales to markets outside the US increased by 24 percent and its international revenues grew by 21 percent over the same period last year. As of the end of the quarter, the company's international business represented more than 10 percent of its total product revenue.
Cole suggested that while the firm's international business is growing, the uptake of its products has been hampered by inconsistent reimbursement in various markets. "[C]ollections have lagged some as we seek to gain consistent reimbursement, similar to what we have experienced in the US in the first two years following the launch of Oncotype DX," Cole said.
"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," he added. "With select countries in Europe, we continue to implement patient-assisted programs, similar to those operated in the US."
Second-Quarter Highlights
Genomic Health's second-quarter revenue grew 13 percent over the same period last year, to $57.6 million from $50.8 million. The company attributed this revenue growth to the increasing adoption of Oncotype DX in new disease markets, such as DCIS breast cancer and colon cancer, as well as international expansion. During the quarter the company delivered more than 19,020 Oncotype DX test results, a 16 percent increase over the 16,390 results it delivered in Q2 2011.
Recently, Genomic Health has been focused on expanding the market for its Oncotype DX colon cancer test. In June, the firm started marketing Oncotype DX as a tool to gauge disease recurrence risk for patients with stage III colon cancer after a clinical validation trial showed that the multi-gene expression test could help doctors determine patients' risk of recurrence better than if they were using just clinical or pathological factors. Additionally, during the quarter the Oncotype DX colon cancer test garnered marketing approval in New York, allowing Genomic Health to now market this diagnostic in all 50 states in the US.
Data presented at ASCO's annual meeting in June "suggest that the Oncotype DX colon cancer recurrence score may be helpful for physicians and certain stage III patients when weighing the risks versus benefits of oxaliplatin treatment," Cole said during the earnings call. "Separately, we are evaluating additional new genes that may be specifically predictive of oxaliplatin benefit." The company is planning to report results from this gene identification study later this year.
During the second quarter Genomic Health's revenues were positively impacted by increased traction in international markets. The firm inked 30 new international contracts and netted new reimbursement deals for the Oncotype DX breast cancer test that brought the total number of covered lives outside the US to 80 million. In the previous quarter, Genomic Health established coverage for the breast cancer recurrence test for an additional 1.8 million lives in Ireland, for one million lives in the Canadian province of Saskatchewan, and for 6.3 million lives in the Catalonia region of Spain.
Beyond the US, Genomic Health currently provides 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.
The company shows no sign of slowing its international push, as this week Genomic Health announced an exclusive agreement with NewBridge Pharmaceuticals under which NewBridge will sell the Oncotype DX breast and colon cancer recurrence tests in Africa, the Middle East, and surrounding regions.
During the quarter, Genomic Health's contract revenue grew 26 percent to $446,000 from $353,000 in the year-ago period. The company's R&D costs increased 17 percent to $11.6 million from $9.9 million in the 2011 quarter, and SG&A spending increased 16 percent to $35.2 million from $30.4 a year ago.
At the end of the quarter, Genomic Health held $57 million in cash and cash equivalents.