Genomic Health this week said it plans to net around $43.3 million in a public stock offering, and would use some of the cash to perform additional clinic trials of its Oncotype DX test in order to convince additional payors to reimburse for the drug, according to a person familiar with the company’s strategy.
Genomic Health said it plans to sell 3 million shares for $15.50 apiece and expects the sale to close on or about May 25. Genomic Health will grant a 30-day option to buy an additional 450,000 shares to cover over-allotments.
The offering comes at a time when Genomic Health’s revenues have been steadily increasing, but the regulatory status of Oncotype DX is in flux, and the company is facing increasing competition in the breast cancer molecular diagnostics space.
Earlier this month, Genomic Health said revenues for the three months ended March 31 swelled to $14.1 million from $5.1 million in the year-ago period. Product revenue from Oncotype DX grew to $13.1 million from $4.2 million.
However, the changing regulatory landscape for laboratory-developed tests may portend some bad news for the company. Two weeks ago, the FDA said that prognostic breast cancer recurrence tests are Class II products, which require only need to garner 510(k) premarket notification, whereas predictive tests will need to receive full premarketing approval.
While this differentiation came as good news for Genomic Health’s competitors Agendia and Exagen, and Quest, which make prognostic breast cancer-recurrence tests, the situation may not be as rosy for Oncotype DX, which is both a prognostic for breast cancer recurrence and a predictive test for chemotherapy response [see PGx Reporter 05-16-2007].
Although the company has remained tight-lipped about its discussions with the FDA regarding the status of Oncotype DX, Genomic Health President Kim Popovits highlighted during the company’s first quarter earnings call earlier this month the company’s success in garnering reimbursement, growing clinical evidence on the diagnostic’s accuracy and specificity, and the test’s predictive capabilities as marketing advantages for Oncotype DX.
“This is just a great space and a great marketplace, and in many ways a rising tide raises all ships,” CEO Randy Scott said during the call. “We have not seen a substantial impact on the adoption rates of Oncotype DX. It’s still very early in this market. We are still growing quarterly in a nice fashion.”
The stock sale, therefore, is a way for Genomic Health to expand its marketing capabilities, fund R&D, and expand its lab operations with an eye toward growing sales and conducting additional clinical trials to convince payors to reimburse for the test.
Offering Money Will go to R&D, Marketing
Sam Tetlow, a principal with Clearview Limited, a consulting service in Raleigh, NC, and a shareholder in the company, told Pharmacogenomics Reporter this week that Genomic Health decided to sell the shares in order to “extend the company’s penetration in getting reimbursement by proving the utility of Oncotype DX in additional clinical trials.”
Genomic Health said it is expecting to net approximately $43.3 million from the offering, which it will apply “for general corporate purposes, including expanding its selling and marketing capabilities, funding research and development activities, and expanding its laboratory operations.”
The company increased its sales force to 50 sales reps in the first quarter. By the end of the second quarter, which runs out in June, Genomic Health expects to have 60 reps. “We expect this steady expansion will allow us to expand both the depth and breadth of our marketing coverage,” said Popovits during the first quarter earnings call earlier this month.
“One of our key goals has to be – and adding folks to the sales force is certainly one way to do this – is to increase the penetration we are getting with the existing customer base,” Popovits added. “The main reason we get for physicians not using [Oncotype DX] on every patient is reimbursement, which we have been addressing along the way.”
During the first quarter, Genomic Health signed on CIGNA HealthCare, Highmark Blue Cross Blue Shield, Humana, and several regional contractors to its growing list of payors who will cover Oncotype DX. Together, Genomic Health said that its payors cover around 125 million lives for its test.
Genomic Health reported that more than 5,450 test results were delivered in the first quarter of 2007 compared to approximately 2,900 test results delivered in the same period the previous year. Additionally, more than 5,500 physicians have ordered a cumulative total of more than 27,000 tests since Oncotype DX became commercially available in 2005.
“One thing we continually hear from physicians is [they are] trying to differentiate tests based on clinical utility,” Popovits said. “What we do know is that not just the clinical evidence has to be there, but the test has to provide actionable information.
“The main reason we get for physicians not using [Oncotype DX] on every patient is reimbursement, which we have been addressing along the way.”
“Payors look for that as well,” he added. “I would specifically focus on the chemotherapy response piece. So being able to help guide the physician regarding whether they use chemotherapy on a patient is huge.”
CEO Scott said Oncotype DX “has a tremendous intellectual property position, and as others enter the space they’ll have to develop their own independent tests and conduct their own clinical trials.
“The physician community is very sophisticated in being able to analyze that information and make the right decision for patients,” he added. “It behooves us to invest in Oncotype DX.”
To that end, Genomic Health plans to expand Oncotype DX’s indication for use in node-positive breast cancer patients and in postmenopausal women with breast cancer treated with an aromatase inhibitor.
Additionally, Genomic Health advanced its clinical program in the first quarter to focus on developing a colon cancer test. According to the company, the colon cancer test is “following a similar clinical development process” as the Oncotype DX assay.
These additional expenditures were reflected in the company’s first-quarter financials, which showed that R&D spending increased to $5.2 million from $2.7 million in the year-ago period.
Sales and marketing and general and administrative expenses in the quarter ballooned to $12.2 million from $7.7 million year over year.
Net loss inched up to $6.9 million from $6.8 million in the first quarter of 2006.
Genomic Health Chief Financial Officer Brad Cole said that although payors made significant contributions to the company’s steadily growing revenues, Genomic Health expects second-quarter revenues to be similar to first-quarter numbers, but with a greater net loss. Based on this prediction and second-quarter 2006 revenues of $8.4 million, Genomic Health’s second-quarter 2007 revenue is likely to grow 68 percent to $14.1 million.
“While we expect [test] adoption to grow quarter to quarter, revenue [on a] quarter-to-quarter basis can be variable because of the uneven nature of payments from recently contracted payors,” Cole said.
The company maintained its guidance of generating between $57 million and $63 million in revenue in 2007 and posting a net loss of between $27 million and $30 million.
Genomic Health had around $35.1 million in cash, equivalents, and investments at the close of the first quarter.