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Edited Transcript of GHDX earnings conference call or presentation 7-May-19 8:30pm GMT

Q1 2019 Genomic Health Inc Earnings Call

REDWOOD CITY May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Genomic Health Inc earnings conference call or presentation Tuesday, May 7, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emily Faucette

Genomic Health, Inc. - VP of Corporate Communications & IR

* Frederic G. Pla

Genomic Health, Inc. - COO

* G. Bradley Cole

Genomic Health, Inc. - CFO

* Kimberly J. Popovits

Genomic Health, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Adam Joseph Wieschhaus

Cowen and Company, LLC, Research Division - Associate

* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Daniel Henry Macek-Alwell

Piper Jaffray Companies, Research Division - Research Analyst

* John Hsu

Raymond James & Associates, Inc., Research Division - Research Analyst

* Kevin Michael DeGeeter

Oppenheimer & Co. Inc. - MD & Senior Analyst

* Mark Anthony Massaro

Canaccord Genuity Limited, Research Division - Senior Analyst

* Mitchell Frank Petersen

Barclays Bank PLC, Research Division - Research Analyst

* Tejas Rajeev Savant

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Jimmy, and I will be your conference operator today. At this time, I would like to welcome everyone to Genomic Health's First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I'd now like to turn the call over to Emily Faucette, Vice President of Corporate Communications and Investor Relations. You may begin your conference call.

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Emily Faucette, Genomic Health, Inc. - VP of Corporate Communications & IR [2]

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Thank you. Good afternoon, everyone, and welcome to Genomic Health's conference call to review our first quarter 2019 financial results. Joining me today to make prepared remarks are Kim Popovits, our Chairman of the Board, Chief Executive Officer and President; and Brad Cole, our Chief Financial Officer. Additionally, Fred Pla, our Chief Offering Officer; and Rick Baehner, our Chief Medical Officer, will be available during Q&A at the end of the call.

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, and a reconciliation of non-GAAP numbers referenced in these remarks can be found in our first quarter 2019 earnings press release.

Before we begin, I'd like to remind you that some of the information presented today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from these expectations. We refer you to our most recent annual report on Form 10-K and quarterly report on Form 10-Q as filed with the SEC, in particular to the section titled 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.

I'll now turn the call over to Kim.

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [3]

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Thanks, Emily. Good afternoon, everyone, and welcome. In the first quarter of 2019, we delivered $108.8 million in revenue, a growth of 17.4% and $13 million in profit driven by significant growth across all key product areas. These strong results are based, in part, on the impact of the landmark TAILORx trial results, which are continuing to drive increased Oncotype DX Breast Recurrence Score test usage globally. We also continued to generate further adoption and private reimbursement for our prostate cancer tests.

I'd like to take a moment to highlight the important accomplishments across our key product areas that drove this quarter's performance, positioning us for double-digit revenue growth for the year. In our core invasive breast cancer business, the practice-changing TAILORx trial results are continuing to elevate Oncotype DX to a new global standard of care, with increasing traction among physicians with high-growth potential to use Oncotype DX more consistently for all medically eligible patients.

With this definitive evidence, it has never been as clear which patients need chemotherapy based on Oncotype DX. Following the rollout of our new test report and physician campaign in December, we recently launched a digital advertising campaign targeting underpenetrated U.S. markets with a branded message encouraging patients to "Put Chemo to the Test with Oncotype DX."

In March, at the St. Gallen International Breast Cancer Conference in Vienna, we presented results from 5 studies including real-world evidence that reinforces the treatment paradigm established by the TAILORx trial. Data from decision impact studies was also presented, highlighting the value of Oncotype DX in personalizing and improving the quality of clinical decisions for patients with early-stage breast cancer, including those with node positive disease.

We expect these new data, which are based on results from thousands of patients in the U.S. and Europe, will support increased uptake globally as they further reinforce the value of Oncotype DX testing. And on the reimbursement front, with IQWiG's exclusive recommendation for Oncotype DX, we continue to anticipate a final national coverage decision in Germany in the second quarter.

Turning now to our oncology -- urology franchise, we have 2 market-leading prostate cancer tests that represent a growth opportunity greater than $500 million. Multiple private insurers established new coverage for the Oncotype DX Genomic Prostate Score, or GPS, test during the first quarter, bringing the total number of U.S. covered lives to more than 114 million, including Medicare.

We also made progress securing additional reimbursement for the Oncotype DX AR-V7 Nucleus Detect test, building on the Medicare coverage that was established in December. During the first quarter, we secured coverage from our first private payer, bringing the total number of U.S. covered lives to more than 61 million. Importantly, in April, NCCN strengthened its prostate cancer guidelines recommending the consideration of AR-V7 testing in metastatic castrate resistant prostate cancer patients following initial treatment with abiraterone or enzalutamide to help guide the selection of further therapy.

Finally, we are continuing to advance the development of a sample-to-answer IVD offering of the Oncotype DX breast cancer test on the Idylla platform. We plan to place this unique and differentiated system at clinical validation sites in France and Germany in the second half of 2019.

I will now turn the call over to Brad to provide further detail on our first quarter financial results.

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G. Bradley Cole, Genomic Health, Inc. - CFO [4]

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Thanks, Kim. We are off to a very strong start in 2019 with double-digit growth in both revenue and tests delivered in the first quarter compared to last year. We delivered double-digit revenue growth for all key product areas and strong profit for the quarter, marking our 15th consecutive quarter of improved non-GAAP profitability.

Total revenue was $108.8 million for the quarter, an increase of more than 17% compared with total revenue of $92.6 million for the first quarter of 2018. On a non-GAAP constant currency basis, total revenue for the quarter grew 18% compared to last year.

Net income for the quarter was $13 million or earnings per share of $0.34 on a diluted basis, an improvement of $16.8 million compared with a net loss of $3.8 million for the same period in 2018. Our gross margin rate was 84.4% for the quarter and is consistent with our expectations for the full year of 2019.

In the first quarter, we delivered more than 37,580 Oncotype DX tests, an increase of 16% compared to a year ago. This strong test growth reflects performance across our business. Notably, both our international and U.S. GPS product areas increased 28% and 25%, respectively compared to the first quarter of last year. Our GPS product area was lifted by contributions from our urology sales force expansion and strengthened guidelines compared to a year ago.

Before walking you through the revenue results across each of our key product areas, I want to point out that the increased revenue recognition rates in our revenue portfolios in the second half of 2018 positively impacted revenue comparisons by approximately 3% in the first quarter of 2019. Without these positive changes to our revenue portfolios, revenue growth would have been approximately 14%, at the high-end of our revenue guidance for 2019.

U.S. invasive breast cancer revenue was $79.8 million for the quarter, an increase of 12.5% compared to revenue of $71 million for the same period in 2018. The increase to revenue portfolios from late in 2018 impacted the revenue comparison by approximately 4% for the first quarter of 2019. Without these increases, revenue growth would have been over 8%. U.S. invasive breast cancer test volume increased 9% for the quarter, driven in large part by the continued rise in adoption following the TAILORx results that were presented and published in June of last year.

International product revenue was $17.8 million for the quarter, an increase of 29% compared with revenue of $13.8 million for the same period in 2018. On a non-GAAP constant currency basis, international revenue for the quarter grew 32.9% compared to last year. As we experienced in the U.S., the TAILORx trial results continued to have a strong impact internationally.

The number of international tests delivered in the first quarter grew 28% compared with the same period in 2018. International test growth continues to be robust and above overall test growth levels, raising international test mix to 25% of total test volume in the first quarter, up from 22% of total test volume a year ago.

U.S. prostate GPS test revenue was $8.5 million for the quarter, an increase of 47% compared with revenue of $5.8 million for 2018. As expected, the strong revenue growth was due, in part, to additional price strength from the new CMS PLA code that took effect in January and increases in private payer reimbursement. GPS test volume increased 25% for the quarter. We believe class penetration is approximately 30%, with Oncotype DX GPS continuing to be the market leading test in low- and intermediate-risk prostate cancer test adoption and revenue.

Similar to the fourth quarter of 2018, company operating margin exceeded 10% of revenue in the first quarter, more than double the percent of revenue in the first quarter of 2018, as all operating ratios continue to improve. We expect operating margin to continue to be above 10% for the year. We delivered more than $21 million in adjusted EBITDA for the quarter. These continuously improved financial results are positively impacting our financial position and allowing for further investment as we expand our business.

Cash, cash equivalents and short-term marketable securities at March 31, 2019, were $205.9 million, a decrease of $3.8 million from the end of last year. Cash flow for the quarter was impacted by routine annual payments related to employee compensation.

As a reminder, achieving the high-end of our 2019 revenue guidance of $448 million assumes: U.S invasive breast test volume growth in the mid to high single digits with revenue at similar levels of growth; Prostate GPS test volume growth of approximately 20% and continued pricing strength from the CMS PLA code effective in 2019; and international test volume growth above 25% with national reimbursement coverage in Germany positively impacting the second half of the year.

Additionally, we continue to expect that our revenue growth will be higher in the first half of '19 than in the second half of 2019 given: first, the step up in test and revenue growth experienced in the back half of last year in our global invasive breast cancer business following TAILORx results presented at ASCO in June 2018. And secondly, increases to our accrual rates for revenue portfolios made in the second half of 2018.

We expect approximately $80 million to $90 million in adjusted EBITDA for the year. With our strong first quarter results and continued adoption and reimbursement across our Oncotype IQ portfolio globally, we believe we are well positioned to deliver double-digit revenue growth and improved profitability in 2019.

I will now turn the call back to Kim.

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [5]

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Thanks, Brad.

As we have seen in the first quarter, we expect the TAILORx results to continue to have a practice-changing impact globally. We look forward to national reimbursement progress in key European markets, including Germany, which is expected to have a positive revenue impact in the second half of the year. And we anticipate increased adoption and private reimbursement for our Oncotype DX GPS test and Oncotype DX AR-V7 Nucleus Detect test, both of which are now covered by Medicare. With these growth drivers, we believe we are well positioned to continue to drive both near- and long-term shareholder value.

Looking ahead, we are more optimistic than ever about further transforming cancer outcomes for patients, physicians and health care systems around the world. With multiple platforms and partnerships, we plan to diversify our Oncotype IQ portfolio with an expanded menu of tests that we deliver globally through our established oncology and urology channels.

Specifically, we believe our development of a unique and highly scalable sample-to-answer IVD version of the Oncotype DX Breast Recurrence Score test positions us for further long-term growth and diversification by: accelerating access in key European markets with a localized solution; opening global access to emerging large markets; providing us with proprietary platform to build a menu of locally distributed tests to be offered through our global commercial channels; and facilitating broader collaboration opportunities with partners seeking localized diagnostic solutions.

Importantly, as a reminder, we recently expanded our exclusive collaboration with Biocartis into the field of urology allowing for the development of an IVD version of our Oncotype DX GPS test. This decision reflects our confidence in the Idylla platform and belief that it will be a differentiated solution to accelerate adoption of both our current tests and future offerings to meet the needs of physicians and patients globally.

In closing, with our proven business model and track record of profitable growth, we are well positioned to further our mission of developing and delivering high-value tests that improve treatment decisions and outcomes for cancer patients around the world while continuing to save health care systems billions of dollars.

I'd now like to open the line for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [2]

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My first one is on Biocartis. I know you guys mentioned that you plan to, I think, place systems in France and Germany in the second half of '19. Can you just clarify if that will be for the Oncotype breast cartridge? And then can you provide a little more granularity on the rollout of the breast cartridge and the prostate cartridge?

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Frederic G. Pla, Genomic Health, Inc. - COO [3]

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Yes. So Mark, this is Fred Pla here. So you're right, we're planning and we're on track to install our first systems at our clinical validation sites in France and Germany by the end of the year. This will be the breast product. And right now, we're planning on launching that at the end of 2020. As far as the prostate product is concerned, we're in feasibility stages right now. Our plan today is to launch this one first in the U.S. So this will be -- we'll have to go through FDA approval for that and we're looking at 2022 as a time frame for that one.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [4]

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Okay. And then maybe one for Brad. I think you indicated adjusted EBITDA guide between $80 million and $90 million. I think previously you're at $90 million-plus. Can you clarify that? And if that's the case, where do you expect the incremental investment to go?

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G. Bradley Cole, Genomic Health, Inc. - CFO [5]

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Yes. We don't really think we changed our view on EBITDA. I mean the guidance for the bottom line is unchanged. And you can see in this quarter the other items, stock-based comp and depreciation and amortization added almost $10 million in the quarter. So we should be in the range of $40 million above our guide. Our guide is $48 million to $54 million. So we're going to be in the mid- to high-80s. So we could be above $90 million, yes.

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Mark Anthony Massaro, Canaccord Genuity Limited, Research Division - Senior Analyst [6]

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Okay. And then my last question relates to the new report you've rolled out, I guess, it's not that new. But can you just give me a sense for the type of feedback you're getting from the new Oncotype breast report? And then any color as it relates to the digital ad campaign? Can you remind us when you launched this and whether or not you're seeing any potential increase in demand as a result of either the ad campaign or the report?

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [7]

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Yes. This is Kim. I'll comment on the patient report and maybe new campaign, and I would love for Emily to talk a bit about the digital campaign where we're very excited about both. So we did launch the new reports in December. We rolled it out at San Antonio. We received great feedback around the simplicity and the clarity that the report is providing as well as the new campaign that has -- never -- it's never been as clear campaign. So it's resonating very well with our audiences, in particular, with the audience that we really need to direct a lot of our efforts towards, which is that group of physicians that is not using the test routinely on all eligible patients.

So where we see the largest potential for growth is where we're seeing greatest movement right now, which is wonderful. So we want to see -- and we're also getting really good feedback on the campaign. We have, however, gotten some request to include more of the clinical data in some of the curves that we had on the formal report. So we're looking at ways to be able to provide that added information to physicians because they really like the continuous biology and certainly respect the development work that we've done over the years and love having that to show in some of their patients. So we may be adding more of that back. But the clarity and the simplicity of what we rolled out in December is really we believe making a significant impact. And Emily, maybe comment on the campaign?

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Emily Faucette, Genomic Health, Inc. - VP of Corporate Communications & IR [8]

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Sure. Yes. We launched our Put Chemo to the Test campaign in late March and this is a targeted digital campaign as part of this broader strategic effort to reach patients in markets where physicians are not using the test as consistently as they could be. And so because of our analytics, we know exactly where these physicians are and have created a very compelling online campaign involving 7 women who've used the test and encouraging patients with a very strong branded message to Put Chemo to the Test with their Oncotype DX score.

And we're running those ads online in those markets in a targeted fashion where we are able to intercept both patients and our caregivers through very targeted placements that allow you to ask question so that when you are serving up the ad, we know that we are giving it to a person who had likely been diagnosed with breast cancer. So it's a series of video ads, a landing page with very specific calls to action. That in doing so indicate that there is a likelihood they are going to talk to their doctor about the test. So it's very early days, but we're pleased with the online traction, traffic and conversion rates that we are seeing in these early days, and we'll continue to optimize the campaign as we learn more about what's working over the course of the next couple of months and look at how that activity is playing out.

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Operator [9]

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And our next question comes from Brandon Couillard with Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [10]

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Kim or Brad, I would love to hear an update about how you think the new prostate reps from -- that you added last year kind of developing, and with reimbursement improving, what's your appetite for perhaps adding additional head count there? And Brad, could you spike out the impact of the PLA codes on prostate specifically in the quarter?

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G. Bradley Cole, Genomic Health, Inc. - CFO [11]

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Yes. In terms of the reps, we have typically seen the ramp-up take 2 to 3 quarters, and we're now out at quarter 3 and we think we saw the impact in the quarter of continued traction from the reps. We don't have any current plans to expand the sales force in the current year. We believe the optimal size is probably in the 60 to 70 range, and we're below 50 today. So there is room to grow. If we see continued traction, I would imagine, it's probably in 2020 we'll make another investment in the field force.

The PLA code was significant in the quarter, probably approximately -- we've reported 47 points of growth. Less than half of that was from the PLA code. We had 25% growth in volume and probably 15% to 20% of the growth was from the PLA codes. So significant change. I'll remind you that why would a PLA code be so significant is because the prostate test is nearly half of the volume come from Medicare. So it changed like we saw in pricing that was quite significant moving from the low 3000s to the high 3000s on such a significant piece of our volume had a nice impact on overall revenue reported and the growth of revenue.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [12]

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And more of a higher level question for you, Kim. I mean, you've done a pretty good job, I think, a pretty prudent job last couple of years calling lower prospect partnerships in a pretty quick fashion. Just curious how you're thinking about the strategic sort of business development pipeline? I mean you've got $200 million of cash on the balance sheet. Are you actively pursuing other sort of similar partnerships? And curious if the M&A might be on the table or not?

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [13]

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Well, it remains on the table and something that we're very interested in. And it's great to be sitting in a position now where we've significantly increased, of course, the value of the company, and we've got growth moving in a really nice direction. So Fred and his team are constantly looking at opportunities that would best fit our channels across the globe but offer us potential good partnerships in that way that could be near-term accretive. So stay tuned.

We are looking at a number of things, and of course, interested in pursuing some of the things that you saw on the game board that we laid out earlier in the year. So looking at opportunities that expand beyond early-stage diagnosis into disease-monitoring, recurrence-monitoring and all of which are of significant interest to us. And I would also add with that having now the ability to work with multiple platforms, whether it would be NGS or PCR or now having the opportunity to work within the IVD platform with the Idylla system, we really think it expands the menu of opportunities that we can pursue and then offer also to collaborators.

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Operator [14]

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And our next question comes from Bill Quirk with Piper Jaffray.

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Daniel Henry Macek-Alwell, Piper Jaffray Companies, Research Division - Research Analyst [15]

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This is Dan on for Bill. As you guys previously communicated that $5 million target for AR-V7. One, I was just wondering if you could give us an update there. I'd say, it sounds like you're happy with where you're at. And then two, given that now that you're seeing reimbursement for AR-V7 -- sorry, that was just what I thought, could you give us an idea of what 2018 might have looked like given the reimbursement levels you guys are currently seeing?

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G. Bradley Cole, Genomic Health, Inc. - CFO [16]

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Yes. So AR-V7, you're right. You've good memory. That we thought that the upside was as high as $5 million. So we're expecting $7 million from AR-V7. It could be as high as what you sighted as $5 million. And we're off to a good start. CMS reimbursement just occurred late December. That was operationalized in the quarter and we are seeing first real revenues from AR-V7 and we think it'll make a meaningful difference over time.

In terms of reimbursement from '18, I think you asked about, there was virtually no reimbursement before Medicare happened in the fourth quarter. And so we don't really have any revenues to report on in '18. So everything -- in '19, there's an incremental and our growth driver in that sense because all compared back to virtually nothing in '18.

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Daniel Henry Macek-Alwell, Piper Jaffray Companies, Research Division - Research Analyst [17]

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Okay. Got you. And then lastly for me, could you just provide some color on that reimbursement opportunity in Germany? It sounds like you're comfortable with the high end of your revenue guidance right now. I'm just wondering what kind of outlook you guys are baking in for the rest of the year there and if it's still in line with your initial expectations?

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G. Bradley Cole, Genomic Health, Inc. - CFO [18]

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Yes. So you're right to have sighted that the national reimbursement decision, which we expect here in the next couple of months was a growth driver in our high-end guidance, and we still think that's on track. And should that happen as planned, we will be tracking towards the high end of guidance. I'll point out that if you look at all our metrics in Q1, they all track very nicely with the guidance we gave around the high end, with the exception of Germany, which was going to impact the second half, so it wouldn't have been a part of Q1 metrics. But we're highly confident that we're on track to see a decision this quarter.

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Operator [19]

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And our next question comes from Doug Schenkel with Cowen and Company.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [20]

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This is Adam Wieschhaus on for Doug. It was a strong international test growth this quarter driven by TAILORx and it looks like international ASPs went up as well. So was international growth primarily driven by uptick in the U.K. market where you have reimbursement today?

And then second part of my question is, do you see a lot of potential for international ASP upside from here as you penetrate markets like Germany and France? I think you mentioned a EUR 2,000 target or higher might be acceptable just concerning the adoption is pretty low there.

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G. Bradley Cole, Genomic Health, Inc. - CFO [21]

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Yes. It was a strong quarter for international. We've been targeting growth above 25%. We saw 28% this quarter in test growth. Revenue on a reported basis was 29%. And you're correct to point out that we're above 30% on a constant currency basis. So ASP hasn't changed but much, it's changed a little bit, a couple of 3 percentage points that's why we're tracking a little bit higher in revenue than we're on test. It hasn't been in any one particular market. There weren't new reimbursement decisions or new coverages in the quarter. I think we just had continued success with collections and maybe the test mix was a little more towards the U.K. and Canada.

As for what happens when we get reimbursement, the ASP in international is running around $,1,900 or so. If the IVD is reimbursed at EUR 2,000, say for in your example, that may not be what we yield from it but we assume that we yield EUR 2,000 or so, then ASP will track pretty much where it is today. So there's -- we're not expecting a big lift from IVD pricing, we're expecting a big lift from access to the market and to be able to grow the penetration in these key markets in Western Europe is a primary driver of this program. It's less about ASPs, it's more about access.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [22]

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Okay. That's super helpful. And then maybe I missed it, but did you provide any update on where you stand with the French reimbursement?

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G. Bradley Cole, Genomic Health, Inc. - CFO [23]

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We did not. We are still getting reimbursed through the same multi-gene assay access program that is for the last several years. We would hope to move that forward. Frankly, France is a bit of a laggard and some of the other countries in Europe. But Germany is probably a good year ahead of them in their decision processes, and we're working hard to move the parties a bit forward in France.

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Operator [24]

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And our next question comes from Kevin DeGeeter with Oppenheimer.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc. - MD & Senior Analyst [25]

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I just want on to follow-up on some of the earlier comments with regards to digital ad campaign. And specifically, I guess 2 lines of thought. First, should we think about this as really a recurring piece of the sales and marketing budget where you'll continue to benefit from ongoing touch in the markets you've identified? And then can you just sort of define for us some metrics you may use to think about whether it's appropriate to explore other options to leverage digital channels, maybe in conjunction with your sales people or in certain situations perhaps even in lieu of adding additional reps?

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Emily Faucette, Genomic Health, Inc. - VP of Corporate Communications & IR [26]

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Kevin, it's Emily. Thanks for the question. Yes. You can think of this as an ongoing effort. And in fact, it is something we've been doing digital activity and outreach to patients specifically for years now. This is more a kind of an enhanced bolder direct message in light of TAILORx. So we will continue to target and look at ways to reach patients with this message. And the beauty about digital is that we can optimize the campaign in real time. We can shift where we're running it, how we're running it and really look at on almost a regular basis the activity that we're seeing whether it's traffic to our website and, most importantly, conversion. So are these patients and their caregivers who we are targeting online, are they taking action that leads us to believe that they are going to ask their doctor or have a conversation with their doctor about the Oncotype DX test.

So it's digital. It's something that's been part of our marketing mix, if you will, for a long time. And now it is in a more enhanced level and something that we plan to continue to do. But obviously we'll be looking very closely at how the campaign is performing. So that we can continue to be effective and efficient in our use of resources towards this. But we believe now especially with TAILORx is the time absolutely we'll be going directly to patients to make sure that all medically eligible women and men who get breast cancer have access to Oncotype.

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [27]

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Yes. I would just add to that. What we do know from market research that we've done along the way is that when patients ask for the test, they get it. And so we think this timing of this campaign and I would compliment Emily and her team did a brilliant job with it. We've already received such positive feedback on it, but it's extremely compelling to intercept, educate and motivate those patients to be asking for this test before making their treatment decision around chemo.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc. - MD & Senior Analyst [28]

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Great. And then maybe as my follow-up question. For the international market, can you remind us as to the level of confidence you have in Germany around a decision in the second quarter? Yes, what are the parameters in terms of the drive to some sort of requirement to actually communicate an outcome? And then perhaps on a different note but also pertaining to international, as that piece of the business continues to grow and be a bigger piece of total revenue, are there differences in relative seasonality with regard to pull-through in Europe than you see in the U.S. that perhaps we should be mindful?

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [29]

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Well, I'll start with our expectations around the decision. What we go by is what is recorded and what is being told to us just in terms of the process and what we publicly know about how this process happened for G-BA. So our expectation is that they will have an upcoming meeting where this decision will be finalized, and then there is a process beyond that that seems pretty well laid out. So we don't want to -- it gets out of our SKUs here. We tend to, I think, lean towards being a little bit more conservative, but we do expect that we'll have that decision in this quarter. And given the exclusive recommendation from IQWiG and already the public statements around this having an impact on the decision from G-BA, we feel confident that we'll see a decision shortly.

And then regarding the seasonality, I think, we can say the same thing for the business in Europe as the U.S, summer tends to be the slow down time there. But otherwise I don't think we've noticed anything that's been...

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G. Bradley Cole, Genomic Health, Inc. - CFO [30]

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Yes. I mean we started really less seasonality in the spring versus what we experienced in the U.S., but primarily it's a summer quarter.

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Operator [31]

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Our next question comes from Tycho Peterson with JP Morgan.

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Tejas Rajeev Savant, JP Morgan Chase & Co, Research Division - Analyst [32]

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This is Tejas. So just one big picture question here on guidance. Kim, it sounds like you guys are very confident in the German decision coming through in the second quarter. France, I mean, no change versus sort of your prior time line expectations. So it's likely being a 2020 event. And the AR-V7 as well, I mean, it sounds like it's off to a good start. You've got north of 60 million lives in the U.S. now. So given all of the positive sort of the incremental updates and the fact that you came in sort of slightly ahead of expectations this quarter as well. Are you sort of like comfortable guiding towards the higher end of the guidance range? Or do you think it's still prudent to be conservative and the midpoint is where kind of like baseline expectations should be?

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G. Bradley Cole, Genomic Health, Inc. - CFO [33]

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Well, I think a guidance range is there for a reason. So I think there are things that could go differently. Certainly, the Q1 is off to a fantastic start. I just remind you that when you adjust for the growth rate on a kind of equal basis, take into account the revenue portfolio upgrades we made late in '18 that we grew 14%. So we're right on track for the high end of guidance. The German reimbursement decision is a factor in staying at the high end of guidance. And you are hearing confidence around Germany and you're hearing confidence around the business. But one quarter doesn't a year make and we're feeling good about the year.

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Tejas Rajeev Savant, JP Morgan Chase & Co, Research Division - Analyst [34]

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Got it. And then in terms of the German decision, has the G-BA put out an agenda yet? Or if not, I mean do you have any sort of expectations around time lines for that occurring? And I believe in the past you've talked about sort of a 60-day period post the G-BA decision before it gets operationalized. Is that still the expectation?

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G. Bradley Cole, Genomic Health, Inc. - CFO [35]

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Yes, I don't think the operational decision is any different and our expectation has met the decision gets made in the second quarter then we would see our revenue starts to come in the third quarter. A code wouldn't get assigned but they can reimburse without a code in the German system. And the code wouldn't probably get assigned until more like the end of the year. So all those things are in place. Of course, we would like to have a decision in March or February or January, of course, it does change a little bit of the dynamic in the back half of the year. But again, back to we -- after such a strong start overall that we're still tracking towards the high end.

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Tejas Rajeev Savant, JP Morgan Chase & Co, Research Division - Analyst [36]

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Got it. And then one final one for me here on AR-V7. Following for the first private payer coming onboard here, I mean, how should we think about the cadence for the rest of the privates to sort of sign on to paying for the test?

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [37]

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Yes. Well, that's I think maybe the same song, third or fourth [verse]. It's a little bit difficult to predict. But if we think about how fast the Medicare came around reimbursing post launch that's certainly a good time to have a private payer on board as soon after Medicare is -- we take that as another good sign. But we also look at just the nature of what this test does and it really acts more like a companion diagnostics to 2 very expensive treatments in a situation where men have a critical decision to make. So it is a compelling story with a really solid health economic benefit behind it. The conversations that we're having with private payers seem to be going very well, but the timing in which they'll make decisions is always really difficult to predict. But we think the story is a really compelling one.

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Emily Faucette, Genomic Health, Inc. - VP of Corporate Communications & IR [38]

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The other favorable factors that recently strengthened guidelines, the prostate treatment guidelines that now recommend considering AR-V7 in men who have been treated with an AR inhibitor to help them make that decision on for their therapy.

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [39]

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And that was just a recent development. So you can be assured that is entering our conversations now and moving them forward.

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Operator [40]

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And our next question comes from John Hsu with Raymond James.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [41]

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First question, could you just give a quick update -- I know it's still early but just any development updates you can provide on IVD for urology?

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Frederic G. Pla, Genomic Health, Inc. - COO [42]

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This is Fred Pla here. So yes, we announced the expansion of our collaboration a few months ago. We're in feasibility stages right now. So we kind of following the lessons that we've learned from IBC, kind of following that process here to start developing it. So it's looking really good right now and we'll keep you guys updated on a regular basis.

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [43]

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And I might just add on to that. One of the real drivers of our interest in the GPS, perhaps, if you think about how urology is practiced in the U.S. and where we are currently with an overall market penetration, it's well less than 50%. With the desire from a lot of large practices where they do their own pathology and have large pathology groups within them. The desire to have a test that they can perform on site and have it done more quickly along with the other pathology they're doing as you can imagine is really high. So we believe that the place to start there is in the U.S. and addressing this need so that we can really fully penetrate that market, which again provides a lot of growth opportunity for us.

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John Hsu, Raymond James & Associates, Inc., Research Division - Research Analyst [44]

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Okay. Great. And then just as a follow-up, anything to call it as we think about the year as far as how margins and expenses you should be tracking, specifically it looks like gross margin for the year came in a little bit higher than the 84% that you're talking about for the year. So is there any kind of mix factor to be considered in as we move forward?

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G. Bradley Cole, Genomic Health, Inc. - CFO [45]

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Well, I think, the only thing to consider is that we're tracking where we thought we would. There's going to be a little pressure from -- if AR-V7 ramps up faster than we think given the margins on the AR-V7 are just structurally lower than the average for the company. But other than that, we're tracking really well there. Reimbursement gains will obviously add to the uplift in what could be possible on a gross margin rate. I think across the year, we're still expecting greater than 10% operating income and continued leverage of the business. We saw our operating ratios improve from Q1 consistently across every line of the P&L. I'm not promising with every quarter that will be the case, but we do expect over time like the last 3 years to see operating ratios improved as we see operating leverage in the business in (technical difficulty) ability in line with our guidance range.

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Operator [46]

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And our next question comes from Jack Meehan with Barclays.

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Mitchell Frank Petersen, Barclays Bank PLC, Research Division - Research Analyst [47]

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This is actually Mitch Petersen on for Jack this afternoon. In the breast franchise, did you see any commercial pricing benefits in the quarter that's outside of the revenue recognition tail end? And then just to confirm the payer upgrade tailwind that's going to annualize in the second quarter.

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G. Bradley Cole, Genomic Health, Inc. - CFO [48]

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No, we didn't see a real change. I mean our coverage is continuing to be strong and reimbursements is tracking where it was as we exited 2018, particularly in the IBC, which is the majority of the business. So no change there. There, when you refer to tailwind, I want to make sure you're talking about the kind of comments I made around the increased revenue portfolio rates in the back half of '18 and the impact we might have on Q2. Is that your question was?

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Mitchell Frank Petersen, Barclays Bank PLC, Research Division - Research Analyst [49]

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Yes, exactly. It sounds like that's going to annualize after 2Q, just wanted to confirm.

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G. Bradley Cole, Genomic Health, Inc. - CFO [50]

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Well, I think what's going to happen is in Q2, we started booking some adjustments. In Q3 and Q4, the adjustments were larger. So that the difference between those 2 numbers, it was like 3 points on growth in Q1. That will get smaller in -- the impact will be smaller in Q2 because we did have some portfolio adjustments in Q2. As we get to the back half of the year, we'll now be looking at what you're calling annualization and we'll have to keep this in front of you because it will go the other way. The adjustments were bigger than what we're going to see the benefit from because there are some catch-up in Q3 and Q4.

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Mitchell Frank Petersen, Barclays Bank PLC, Research Division - Research Analyst [51]

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Got it. That makes sense. And then internationally, I think last quarter you called out revenue growth -- a revenue growth target of about 50% for 2019. Is that still the target? And obviously the growth rate in the first quarter was a little bit lower than that. So is Germany a primary driver that's going to get you to that 50% target for the year? Does that accelerates perhaps the revenue in the back half of the year?

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G. Bradley Cole, Genomic Health, Inc. - CFO [52]

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Yes. So to clarify. Our revenue target is more in the 40% range. I know 50% got into the script. 40% was the target, which would be in the mid-$80 million, $80 million-plus. And the delivery of 33% this quarter was right on target, where we think we would be on a constant currency business and we could get into the higher 30s with the reimbursement from Germany, and into the 40% range if things go swimmingly.

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Operator [53]

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At this time, we will now conclude the Q&A portion of the call. At this time, I'd like now to turn the call back to Kim Popovits.

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Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO & President [54]

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Well, thank you for joining us today and, as always, for your interest in Genomic Health. We're certainly very pleased with the progress we made in the first quarter and very confident about the future. So we look forward to seeing you at some upcoming investor conferences and look forward to our one-on-one conversations. Thanks.

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Operator [55]

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And this concludes today's first quarter 2019 financial results conference call for Genomic Health. You may now disconnect.