U.S. Markets closed

Edited Transcript of GHDX earnings conference call or presentation 1-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Genomic Health Inc Earnings Call

REDWOOD CITY Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Genomic Health Inc earnings conference call or presentation Tuesday, August 1, 2017 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Emily Faucette

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

* Frederic G. Pla

Genomic Health, Inc. - Chief Business & Product Development Officer

* G. Bradley Cole

Genomic Health, Inc. - CFO, COO and Secretary

* Kimberly J. Popovits

Genomic Health, Inc. - Chairman, CEO and President

* Steven Shak

Genomic Health, Inc. - Chief Scientific Officer

================================================================================

Conference Call Participants

================================================================================

* Adam Joseph Wieschhaus

Cowen and Company, LLC, Research Division - Associate

* Anne Edelstein

BofA Merrill Lynch, Research Division - Research Analyst

* Nicholas Michael Jansen

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

* Steven Paul Reiman

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon. My name is Latoya, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Genomic Health Second Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Emily Faucette, Vice President of Corporate Communications and Investor Relations. You may begin your conference.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good afternoon, everyone, and welcome to Genomic Health's Conference Call to review our Second Quarter 2017 Financial Results. Please note, a copy of these prepared remarks that 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 that are not historical, including those about our future and full year financial and operating results; our guidance for 2017 and key drivers and expectations for 2018; payer coverage; timing of revenues from payers and progress and reimbursement in patient access; our plans and prospects; our ability to leverage our existing commercial channel and infrastructure; the success and focus of our business strategy; economic benefits and value of our tests; growth opportunities; future products, product launches in our product pipeline; demand for our tests and drivers of demand as well as correlations between test demand to present or future revenue; effects of foreign currency exchange rates; international expansion; clinical outcomes and timing of clinical studies and publications and expectations regarding potential FDA or other regulation 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 quarter ended March 31, 2017, 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 Operating Officer and Chief Financial Officer; and Steve Shak, our Chief Scientific Officer.

Additionally, Fred Pla, our Chief Business and Product Development Officer, will be available during Q&A at the end of the call. I'll now turn it over to Kim.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Emily. Good afternoon, everyone, and welcome. In the second quarter, we delivered 9% test growth and 5% revenue growth on a constant-currency basis, consistent with the guidance we provided during our first quarter call. With our continued commitment to profitability, we delivered operating leverage for the eighth consecutive quarter, improved net loss by $9 million in the first half of the year and, as guided today, expect to deliver a profit for the full year on revenue between $345 million and $355 million.

Importantly, our unmatched clinical evidence and commercial channel continue to drive strong demand in market leadership. In the first half of the year, we achieved our goal to continue to grow our global invasive breast cancer and U.S. prostate cancer business. Specifically, we increased the number of U.S. invasive breast cancer tests delivered by more than 3% compared with the prior year, maintaining our significant leadership position with approximately 90% share of this market segment; generated 14% test growth and 20% revenue growth across international markets on a constant-currency basis; and continued to accelerate prostate test adoption with 39% volume growth and 52% revenue growth compared to the same period last year. With these strong results, we believe we continue to lead the market in low- and intermediate-risk prostate cancer test adoption.

In prostate cancer, which is a key driver of our near- and long-term growth, we continue to generate compelling data, including the new Kaiser validation study, that support increased utilization and reimbursement for the Oncotype DX GPS test in low- and intermediate-risk patients.

With our planned launch of the Oncotype DX AR-V7 prostate test with Epic Sciences later this year, we will achieve an important milestone in partnering with industry leaders to deliver innovative products through our commercial channel. This is the first test to accurately identify which metastatic prostate cancer patients will not respond to androgen receptor-targeted therapies. The availability of Oncotype DX AR-V7 will allow men with late-stage prostate cancer to avoid wasting time on both costly and potentially ineffective treatment.

While the global reimbursement landscape has delayed our 2017 revenue growth, there is no doubt that demand across our key businesses is strong and growing. Looking ahead, we see significant upside in 2018 with the anticipated January implementation of both PAMA reimbursement rates and AJCC staging criteria, along with the TAILORx intermediate study results. Combined, we believe these milestones will have a significant impact on U.S. invasive breast cancer penetration and international reimbursement and further solidify our market differentiation. In addition, we will have the benefit of a full year of CMS intermediate prostate coverage and expect private reimbursement to follow, leading to strong revenue growth in 2018.

I'll now turn the call over to Brad and Steve to provide further detail on our second quarter financial results, our worldwide commercial and operations progress and recent scientific updates. Fred?

--------------------------------------------------------------------------------

Frederic G. Pla, Genomic Health, Inc. - Chief Business & Product Development Officer [4]

--------------------------------------------------------------------------------

Thanks, Kim. In the second quarter of 2017, we continue to generate strong test growth, delivering a 9% increase in volume or more than 31,550 Oncotype tests compared with the same period in 2016, which was in line with our expectations. We increased year-over-year demand across each of our key markets, including sequential double-digit growth in prostate following a very strong first quarter.

In the first half of 2017, we delivered more than 63,140 tests, an increase of 8% compared with the same period in 2016. Total revenue was $85.5 million in the second quarter of 2017, an increase of 4%. And as guided, with the exception of what we believe is a temporary post-election hold on funding in France until later this year.

Total revenue for the 6 months ended June 30, 2017, was $169.5 million, an increase of 4% compared with the same period in 2016. On a constant-currency basis, revenue increased 5% in both the quarter and 6 months ended June 30, 2017, compared with the same periods in 2016.

In the first half of 2017, we delivered operating leverage of nearly 50% through expense control, excluding the termination of PCR licensing fees. We delivered more than 100% of our growth in revenue to the bottom line, whereby operating income improvement in dollars exceeded revenue growth in dollars during the first half of 2017. We continue to remain focused on improving the bottom line.

Over the past couple of years, we have been committed to improving profitability. In 2016, we improved our operating loss by $20 million, and this year, we plan to further improve our operating loss by approximately $15 million as part of our goal to deliver a full year net profit. We made continued improvements in the second quarter with favorable year-to-date operating and net loss comparisons over last year. Specifically, operating loss improved by $8 million to a $6 million operating loss for the 6 months ended June 30, 2017, compared to the same period last year. Net loss was $3.5 million for the 6 months ended June 30, 2017, compared with a net loss of $12.5 million for the same period last year.

Further, we delivered $13.1 million in positive adjusted EBITDA in the first half of 2017.

I will now walk you through the results across each of our key markets. U.S. invasive breast cancer test volume was up 5% and revenue was up 2% in the second quarter compared to last year. Specifically, U.S. invasive breast revenue was $65.6 million. Accrual revenue tracked test volume. As expected, cash revenue in the quarter of approximately $19 million was similar to the second quarter of 2016 and up $1.7 million sequentially.

For the 6 months ended June 30, 2017, U.S. invasive breast test volume increased more than 3% and revenue grew 2% compared to the same period in 2016. Importantly, we continue to grow our U.S. invasive breast cancer business, increasing market penetration and maintaining clear market leadership.

As a reminder, we received a new CPT code and price for DCIS in the second quarter of 2016. Although DCIS revenue and test were down year-over-year, we delivered sequential growth in test this quarter and, as expected, ASP normalized on a comparison basis. DCIS revenue was under $2 million in the second quarter.

International test volume increased 12%, representing 24% of total test volume in the second quarter, and revenue grew 6% compared to the same period last year. On a constant-currency basis, international revenue was up 10%. We estimate the temporary funding hold in France was approximately $500,000 in revenue in the quarter.

For the 6 months ended June 30, 2017, international test volume increased 14% and revenue grew 16% compared to the same period last year. On a constant-currency basis, international revenue for the first half of 2017 was up 20%. Our U.S. prostate business continued to accelerate in the second quarter with 38% test growth and 83% revenue growth. Specifically, U.S. prostate revenue was $4.1 million and contributed approximately 1/2 of total global product revenue growth.

For the 6 months ended June 30, 2017, U.S. prostate tests delivered grew 39% and revenue grew 52% compared with the same period in the prior year. Specifically, U.S. prostate revenue was $7.4 million and contributed just under half of the year-to-date global product revenue growth.

It is important to note in the first half of 2017, we successfully met our commitment on prostate test growth and expect to see further growth in prostate revenue with finalized CMS reimbursement for intermediate patients and progress with private payers later this year.

As you look to calculate relative market share, it is important to remember that Genomic Health reports test results delivered to physicians for treatment decisions rather than the orders received. Additionally, the opportunity for the utilization of the Oncotype DX Genomic Prostate Score test is 160,000 patients in the United States each year who are designated as either very low, low or favorable intermediate risk and does not include the high-risk patients or the other intermediate-risk patients.

As Kim mentioned, we believe we continue to be the market leader in low- and intermediate-risk prostate cancer based on test volume performance over the last several quarters and recent market research.

Prostate volume represented approximately 11% of total test volume in the second quarter of 2017.

Looking ahead, we expect prostate test volume to continue to lead overall test growth and thereby be an increasingly larger portion of our test volume.

Cash revenue in the second quarter increased sequentially to $25.6 million, in the range of 30% of total product revenue, and an increase of $2.3 million as compared to the first quarter of 2017.

59% of tests delivered and 70% of product revenue were recorded on an accrual basis in the second quarter of 2017. Our gross margin rate was 83.9% in the second quarter, consistent with levels in recent years and an improvement over the second quarter of 2016. We continue to expect gross margin rate to range between 83% and 84% for the remainder of the year.

Turning now to guidance. For the full year ending December 31, 2017, we now expect to deliver total revenue of between $345 million and $355 million. Formerly, the range was between $355 million and $370 million. We have adjusted the guidance range for revenue to reflect the unknown timing of TAILORx intermediate results and reimbursement delays, specifically delays in CMS intermediate coverage, which is now expected later in the year compared to early Q2, as well as private prostate coverage; an unexpected hold on French payments following the recent presidential election; and lighter than expected DCIS revenue.

It is important to note, we remain pleased with the pace of adoption in our key markets globally, which continues to track as expected with growth for the year above 8%. We are committed to delivering a full year profit at either end of the new revenue guidance, which represents an improvement in our net income outlook from February. This commitment to the bottom line requires spending adjustments across the year and across our organization of nearly $16 million compared with our plans from when we entered the year. We expect our net income results in both the third and fourth quarter to exceed those of 2016. By delivering these strong bottom line results in the second half, we will have achieved 10 consecutive quarters of bottom line improvement by the end of 2017 and a full year profit.

Looking ahead to the third quarter, we expect revenue of approximately $87 million. We anticipate we will return to double-digit revenue growth in the fourth quarter with finalization of expanded CMS coverage for intermediate-risk prostate cancer patients and continued growth in our global breast business. Importantly, as Kim mentioned, we expect several key catalysts will drive strong revenue growth in 2018, positioning us for long-term success with continued improvements in full-year profitability.

I will now turn the call over to Steve to discuss recent clinical milestones.

--------------------------------------------------------------------------------

Steven Shak, Genomic Health, Inc. - Chief Scientific Officer [5]

--------------------------------------------------------------------------------

Thank you, Brad. Our recent scientific presentations and publications emphasize the continuous nature of cancer biology and the best-in-class performance of our Oncotype IQ portfolio of tests.

In breast cancer, 5 studies were presented at the ASCO Annual Meeting, including new analyses from our collaboration with the Surveillance, Epidemiology and End Results, or SEER, registry program, focused on outcomes in more than 49,000 women who have received an Oncotype DX Breast Recurrence Score test.

One of these analyses evaluating the risk of breast cancer-specific mortality across the full range of Recurrence Score results is consistent with previous validation studies indicating that women with Recurrence Score results less than 25 have limited benefit from chemotherapy, whereas those with scores greater than 25 appear to benefit.

As we await the full results and definitive conclusions from the prospective randomized TAILORx trial, these new SEER findings suggest that TAILORx will not only more precisely define the effect of chemotherapy in breast cancer, but that it will also identify a larger group of women who can be treated confidently with hormonal therapy alone.

In July, the St. Gallen International Breast Cancer Conference expert panel published updated guidelines endorsing Oncotype DX for guiding chemotherapy treatment decisions in both node-negative and node-positive breast cancer patients. Importantly, Oncotype DX was the only test supported by a majority of panelists for its value in providing information that can help physicians decide to omit chemotherapy in patients with up to 3 positive nodes.

In addition to these updated guidelines and positive studies presented during the quarter, it is encouraging to see recently published data reinforcing that there is a spectrum of continuous biology in breast cancer and growing evidence from all research groups on the importance of more precise estimates of risk and chemotherapy benefit. This is exactly the intelligence that the Oncotype DX individualized Recurrence Score result has provided to more than 750,000 breast cancer patients over the past 13 years.

In urology, we presented important new data validating the Oncotype DX Genomic Prostate Score, or GPS, to predict long-term outcomes, including metastasis and prostate cancer death, in a large community-based multi-center clinical validation study conducted at Kaiser Permanente. Importantly in this study presented at AUA, no patient with NCCN very low, low or intermediate risk disease and a GPS result of less than 20 developed metastases or died due to prostate cancer.

At ASCO, another presentation looking back at earlier studies confirmed that men with a GPS result of less than 20 are at extremely low risk of developing metastatic disease or dying from prostate cancer in the 10-year period following radical prostatectomy. Given the strength of these Kaiser study results and their expected impact on clinical practice, in late May, we updated our GPS patient report to incorporate these additional critical endpoints. The new report now includes an easy to interpret risk assessment based on the NCCN framework that captures clinical and pathologic features and an individual's tumor biology revealed by GPS, providing personalized risk for prostate cancer-specific death, the development of metastases and adverse pathology.

We have received positive feedback on the new report confirming the comprehensive risk assessments for both the current state of a man's prostate cancer and the future risk for each man diagnosed with prostate cancer enhances the ability of urologists and their patients to make the important decision between active surveillance or definitive treatment.

We believe the compelling Kaiser validation study results, our ongoing clinical utility projects with payers and increasing demand for the Oncotype DX Genomic Prostate Score test will lead to additional reimbursement, beginning with expanded CMS coverage for intermediate patients when the LCD becomes final later this year. We expect subsequent private coverage to follow.

Finally, in preparation for the commercial launch of the new Oncotype DX AR-V7 Nucleus Detect test in collaboration with Epic Sciences, we recently initiated an early access clinical utility program for select centers around the country. As a reminder, Oncotype DX AR-V7 is the first test to accurately identify which metastatic prostate cancer patients will not respond to androgen receptor-targeted therapies. This early utility program with our -- the oncologists and the urologists we serve aims to get feedback to ensure that, as we scale up, we continue to deliver consistent, high-quality tests and the exceptional customer service that people expect from Genomic Health and Epic Sciences. We will make the test widely available in the United States later this year.

I will now turn the call back to Kim to conclude.

--------------------------------------------------------------------------------

Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO and President [6]

--------------------------------------------------------------------------------

Thanks, Steve. By providing clinically actionable insight, our growing Oncotype IQ portfolio of tests enable patients to experience the immediate value of precision medicine, addressing both the overtreatment and optimal treatment of cancer. Our focus for the remainder of the year is clear as we work to improve revenue growth, including double-digit growth in the fourth quarter, and deliver full-year profitability at either end of the adjusted revenue guidance.

Importantly, there are multiple catalysts on the horizon that we expect to fuel future revenue growth. Specifically, in 2018, we anticipate a full year of CMS intermediate prostate coverage and expanded private reimbursement; implementation of both the PAMA market-based pricing and AJCC staging criteria for the Breast Cancer Recurrence Score in January; impact of intermediate Recurrence Score results from the TAILORx study; and further reimbursement traction in Europe.

In closing, as August marks our 17th anniversary, it's timely to reflect on a bold vision to revolutionize the treatment of cancer through genomic testing. Once clinically unproven and scientifically challenging, we pursued this vision with passion, determination and substantial investment. Today, we are proud to share that more than 800,000 actionable test results have now been delivered to patients, generating more than $2 billion in revenue and more than $4 billion in savings to the healthcare system, proving that we have pioneered a successful and sustainable business that is leading the revolution of precision medicine.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Nicholas Jansen of Raymond James.

--------------------------------------------------------------------------------

Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [2]

--------------------------------------------------------------------------------

First on prostate, I just wanted to get a better understanding of when exactly you expect the CMS intermediate coverage to play out in terms of what you built into the guidance and, more importantly, thinking about over the next 12 months, as that coverage decision is made final, your private prostate coverage and where we should stand maybe 6, 12, 18 months from now on coverage there.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Maybe I can start with the timeline, and Brad, you want to jump in on impact?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I can tell you what we know for sure, is the comment period closed on July 20, so that has been done. We would expect, given not what we believe will be a lot of controversy over this LCD, that we would see a posting of it relatively soon. And then, of course, there's a 45-day notification period. So in terms of exactly when we start to see the revenue, it's a little difficult for us to predict, but we certainly think it will be in the near term.

--------------------------------------------------------------------------------

G. Bradley Cole, Genomic Health, Inc. - CFO, COO and Secretary [6]

--------------------------------------------------------------------------------

In terms of impact, Nick, at our current run rate it's about $500,000 or $600,000 a month that we'd expect from the intermediate coverage in the Medicare population. And we think Medicare coverage, like in past products and in past years, has been a great leader into prostate -- excuse me, into private coverage. And things like guidelines and other things will be important as well, but Medicare coverage is a big first step, and we think the expanded coverage is going to continue to put pressure on private payers who -- many of whom have not yet covered even low- and very low-risk patients.

--------------------------------------------------------------------------------

Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [7]

--------------------------------------------------------------------------------

And then my second question would just be on profitability. Congrats on the focus, the continued focus there and the ability to deliver positive net income this year even with the lower top line guidance. But I just wanted to get your thoughts on how you're thinking about margin trends longer term? Obviously, you have some opportunities within liquid biopsy to perhaps accelerate R&D investment longer term. There's probably things that you might be looking at from a business development perspective as well. So I just wanted to get your thoughts on, is this commitment this year going to be leveraged in '18 and beyond?

--------------------------------------------------------------------------------

G. Bradley Cole, Genomic Health, Inc. - CFO, COO and Secretary [8]

--------------------------------------------------------------------------------

Yes, I think that we've demonstrated over the last couple years, and clearly with this updated guidance, the continued commitment to leverage on our top line. So the improvement we saw in '16 of $20 million and $15 million improvement here in '17 represents in the order of 40% to 50% of every new revenue dollar going to the bottom line, and we think that's the approach we're going to take in the foreseeable future. There will be opportunities to invest more or less in different projects over the next 2 to 3 years, and we have to make those choices and still deliver the improved bottom line. So we're committed to that completely. And as it relates to BD, we're going to be careful to do things that help us move the top line while improving the bottom line.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question is from Doug Schenkel of Cowen & Company.

--------------------------------------------------------------------------------

Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [10]

--------------------------------------------------------------------------------

This is Adam Wieschhaus on for Doug. My first one was on international breast. The volume growth this quarter was a little lower than we had forecast, and it seems like it's the lowest it's been in the last maybe 6 quarters or so. Was this primarily attributed to the France funding dynamics you were mentioning earlier? Or was there another factor that could have also challenged volumes in the quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So volume was in the teens, and it's been running in the 12% to 17% range pretty consistently. So our view is that volume has been running consistently there. But I think if you're pointing out a change in revenue, the revenue was single digit on a -- well, on a dollar basis, and it was double digit on a constant-currency basis. So the revenue pulled back.

And I think what you see there is that we've -- some quarters were stronger in one country than another, and payments get cached and pulled forward, like Switzerland, who had a strong contribution in Q1 but not in Q2. And this French situation would have had us reporting another 4% to 5% growth if the French funding hadn't been put on pause. So I may have to check my facts, but I think we've been consistent in growing the test volume in double digits, and this quarter you've seen a little shift in the revenue growth. Yes, that's right.

--------------------------------------------------------------------------------

Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [12]

--------------------------------------------------------------------------------

Okay, that's helpful. And then you indicated that you had invasive breast volumes -- I believe you said grew 5% while the revenues grew 2%. Was this just because of cash collections again in the quarter? And should we expect that to align closer, volumes with revenue, in the back half of the year? Or is this kind of dynamic going to continue?

--------------------------------------------------------------------------------

G. Bradley Cole, Genomic Health, Inc. - CFO, COO and Secretary [13]

--------------------------------------------------------------------------------

We think that there's going to be more alignment in the back half of the year than we see in the first half of the year and going forward. We had extremely strong cash revenue collections in the first half of last year following our systems cutover. And it's important to point out that our cash revenue this quarter was the second highest ever in the history of the company, which is comparing back to a really strong first half. So while test grew 5%, accrual revenue also grew 5%. And it was just the -- when you add in 20%, 30% of a factor that grows to doesn't grow, the average comes down. So over time, that will more normalize.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question is from an Anne Edelstein of Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Anne Edelstein, BofA Merrill Lynch, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Just a question about the Epic partnership. I was wondering if you could discuss the economics behind that agreement. I realize that you're licensing the technology but, I mean, what are the impacts that we should expect for next year, I guess, as that comes to fruition?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, so this is -- you rightly point out that it's a partnership where we're helping them market the test. And it's going to be -- the impact on our business is going to be dependent on reimbursement progress. So we've got work to do there, like any new test, and we're making the product available this year and expect to make some progress in reimbursement next year. Are you looking for a quantification? We've talked about the size of the market...

--------------------------------------------------------------------------------

Anne Edelstein, BofA Merrill Lynch, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

Of course.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, well there are about 50,000 men each year who are diagnosed with castrate-resistant prostate cancer, and they need a test like this, we believe, to help them understand whether they're going to ever develop resistance to androgen receptor type therapies. So that's the market, and it's yet to be seen what that price point is going to be. But we're in that dialogue and in that process now over the next several months or several quarters to determine that. We think there's high value here and this should command a price much like our other Oncotype tests.

--------------------------------------------------------------------------------

Anne Edelstein, BofA Merrill Lynch, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Okay. That's helpful. And then I think that you talked about what you think is a reasonable timeline for Medicare reimbursement in the intermediate-risk population. But can you just discuss your level of confidence and what underlies that confidence in terms of getting commercial reimbursement? It sounds like you think that, that can happen maybe in 2018.

--------------------------------------------------------------------------------

G. Bradley Cole, Genomic Health, Inc. - CFO, COO and Secretary [20]

--------------------------------------------------------------------------------

Well, we certainly have high confidence in the Medicare coverage being expanded to intermediate patients, given the comment period just closed. And the comments were strongly supportive of our tests, and we'd expect sometime later this year that, that will come through. And like other products, it's taken longer to get private payers on board, and I think it's going to require strengthening of guidelines and continued publications to bring them on board, but it doesn't hurt to have a broad coverage support from Medicare, which we expect in the near future. So work to do...

--------------------------------------------------------------------------------

Anne Edelstein, BofA Merrill Lynch, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Do you think that you need prospective survivorship data to get commercial coverage?

--------------------------------------------------------------------------------

Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO and President [22]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, not survivorship data. We're doing some clinical utility studies with a bunch of private payers. And Steve, you might want to...

--------------------------------------------------------------------------------

Steven Shak, Genomic Health, Inc. - Chief Scientific Officer [24]

--------------------------------------------------------------------------------

Yes, I might comment on the additional data. Clearly, the recent data that was presented at AUA that shows that the tests does predict prostate cancer or mortality in metastases is important in terms of guidelines.

I think the second thing that's important in terms of guidelines now is there are -- now we have 22 studies and more than 4,200 patients. And so the whole concept, again, that gene expression tests provide valuable information, additional information that you can't get by just looking at the Gleason score is clear.

And then the third thing that also was presented this year, which we know is important to the private payers, is also, if someone goes on active surveillance, are they going to stay on active surveillance after using our test. And actually that -- we have new data on that, and that's going to be written and published as well.

So these are all the things that I think Brad was just alluding to when we're saying that it's now getting guidelines that's going to help us drive the private payers.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Tycho Peterson of JPMorgan.

--------------------------------------------------------------------------------

Steven Paul Reiman, JP Morgan Chase & Co, Research Division - Analyst [26]

--------------------------------------------------------------------------------

This is Steve Reiman on for Tycho. So you mentioned PAMA in the prepared remarks. We're halfway through the year. It's ostensibly set to take effect in January. Can you remind us how the implementation of this rule is expected to impact your CMS pricing?

--------------------------------------------------------------------------------

G. Bradley Cole, Genomic Health, Inc. - CFO, COO and Secretary [27]

--------------------------------------------------------------------------------

Sure. So we've already done the work and submitted the data for it. And it looks like it will have about an up to 15% increase on our invasive breast price with Medicare. So several hundred dollars per test, which is significant. And it could be as much as $6 million to $8 million lift on revenue at the same volume, in the first year.

--------------------------------------------------------------------------------

Steven Paul Reiman, JP Morgan Chase & Co, Research Division - Analyst [28]

--------------------------------------------------------------------------------

Got it. And then prostate volume obviously remains strong. And this might be a little difficult to parse out, but are you able to give us any color on how much of this is being driven by new prostate reps ramping versus kind of increasing penetration of the overall market? And on that same note, do you expect to hire additional prostate reps over the next couple quarters, or do you feel kind of good about where the headcount is right now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, on the first part I'd say a bit all of the above. So we continue to add new customers. We continue to penetrate the customers we have to a greater extent. I think our team has done a really nice job in terms of just targeting where our small force to date is focused. And we're seeing the results of that and we're very pleased with it. We will expand that group over time, have not made any firm plans yet necessarily, whether we do it at the end of this year or next year. So those plans are in the works right now. But we eventually will expand that group as we see traction both with reimbursement and the continued penetration.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

We will now conclude the Q&A portion of the call. At this time, I will now turn the call back over to Kim Popovits.

--------------------------------------------------------------------------------

Kimberly J. Popovits, Genomic Health, Inc. - Chairman, CEO and President [31]

--------------------------------------------------------------------------------

Great. Thanks for joining us today and for your interest in Genomic Health. We look forward to seeing some of you at upcoming conferences this quarter. Have a great day.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

And this concludes today's second quarter 2017 conference call for Genomic Health. You may now disconnect.