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| GHDX > SEC Filings for GHDX > Form 10-Q on 12-May-2008 | All Recent SEC Filings |
12-May-2008
Quarterly Report
future revenues that we may derive from Medicare patients or categories of
patients; our success in increasing patient and physician demand as a result of
our direct sales approach; plans for enhancements of Oncotype DX to address
different patient populations of breast cancer or to report single gene results;
plans for, and the timeframe for the development or commercial launch of, future
tests addressing different patient populations or other cancers; the occurrence,
timing, outcome or success of clinical trials; our intellectual property and our
strategies regarding filing additional patent applications to strengthen our
intellectual property rights; our belief that we are in material compliance with
our financial covenants; our beliefs regarding our unrecognized tax benefits;
the impact of accounting pronouncements and our critical accounting policies,
estimates, models and assumptions on our financial results; our anticipated cash
needs and our estimates regarding our capital requirements and our needs for
additional financing; and anticipated trends and challenges in our business and
the markets in which we operate.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expected. These risks and
uncertainties include, but are not limited to, those risks discussed in Item 1A
of this report, as well as our ability to develop and commercialize new
products; the risk of unanticipated delays in research and development efforts;
the risk that we may not obtain reimbursement for our existing test and any
future tests we may develop; the risks and uncertainties associated with the
regulation of our test by FDA; our ability to compete against third parties; our
ability to successfully respond to rapid growth; our ability to obtain capital
when needed; and our history of operating losses. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to update any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
In this report, all references to "Genomic Health," "we," "us," or "our" mean
Genomic Health, Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype DX and Recurrence
Score are trademarks or registered trademarks of Genomic Health, Inc. We also
refer to trademarks of other corporations and organizations in this report.
Business Overview
We are a life science company focused on the development and
commercialization of genomic-based clinical diagnostic tests for cancer that
allow physicians and patients to make individualized treatment decisions. Our
first test, Oncotype DX, was launched in 2004 and has been shown to predict the
likelihood of breast cancer recurrence and the likelihood of chemotherapy
benefit in a large portion of early-stage breast cancer patients. All tumor
samples are sent to our laboratory in Redwood City, California for analysis.
Upon generation and delivery of a Recurrence Score report to the physician, we
generally bill third-party payors for Oncotype DX. Effective June 1, 2007, we
increased the list price of our test from $3,460 to $3,650.
Adoption and Reimbursement
For the three months ended March 31, 2008, more than 9,150 test reports were
delivered for use in treatment planning, compared to more than 5,450 test
reports for the three months ended March 31, 2007. As of March 31, 2008, more
than 55,000 test reports had been delivered for use in treatment planning. We
believe increased demand resulted from the inclusion of Oncotype DX in the
clinical practice guidelines of the American Society of Clinical Oncologists, or
ASCO, and the National Comprehensive Cancer Network, or NCCN, continued
publication of peer-reviewed articles on studies we sponsored, conducted or
collaborated on that support the use and reimbursement of Oncotype DX, clinical
presentations at major symposia, and our ongoing commercial efforts. However,
this increased demand is not necessarily indicative of future growth rates, and
we cannot assure you that this level of increased demand can be sustained or
that publication of articles, future appearances or presentations at medical
conferences or increased commercial efforts will have a similar impact on demand
for Oncotype DX. We believe that each year we may experience slower growth in
demand for our test in the second and third calendar quarters, which may be
attributed to physicians, surgeons and patients scheduling vacations during this
time. As of March 31, 2008, our laboratory had the capacity to process up to
12,000 tests per quarter.
We have recently expanded the clinical utility of Oncotype DX. In
February 2008, we introduced quantitative gene expression reporting for estrogen
receptor, or ER, and progesterone receptor, or PR, genes with the Oncotype DX
Recurrence Score report to provide additional information for clinical decision
making. We believe that reporting individual gene scores in addition to the
Recurrence Score result may have utility in predicting outcomes for specific
therapies or disease subtypes. At the December 2007 San Antonio Breast Cancer
Symposium, we presented results from a study suggesting that Oncotype DX may be
useful in predicting survival without disease recurrence and the benefit of
chemotherapy for node positive, or N+, patients, in addition to patients with
node negative, or N-, estrogen receptor positive, or ER+, breast cancer. As a
result, we have experienced an increase in usage of Oncotype DX for N+ patients.
However, most of our existing reimbursement coverage is specifically for women
with early-stage N-, ER+ breast cancer. We may not be able to obtain
reimbursement coverage for Oncotype DX for breast cancer patients with N+, ER+
disease.
As of March 31, 2008, Cigna HealthCare, Humana, Inc., Health Net, Inc.,
United HealthCare Insurance Company, Aetna, Inc., Kaiser Foundation Health Plan,
Inc. and National Heritage Insurance Company, or NHIC, the local Medicare
carrier for California with jurisdiction for claims submitted by us for Medicare
patients, have issued positive coverage determinations for Oncotype DX for
patients with N-, ER+ disease. WellPoint, Inc. adopted an expanded policy
covering Oncotype DX for the majority of women diagnosed with N-, ER+ breast
cancer. In January 2008, Medi-Cal, our first Medicaid payor, established a
policy covering our test. In addition, a number of regional payors, including
many regional Blue Cross and Blue Shield providers, have issued policies
supporting reimbursement for Oncotype DX. As of May 2008, approximately 80% of
all U.S. insured lives were covered by health plans that provide reimbursement
for Oncotype DX through contracts, agreements or policy decisions.
In late 2007, the Centers for Medicare and Medicaid Services, or CMS,
announced that Palmetto Government Benefits Administrators, or Palmetto, will be
replacing NHIC as the California Medicare administrative contractor with
jurisdiction for all claims submitted in California to Medicare. Medicare claims
processing responsibility will transition from NHIC to Palmetto over the next
several months with Palmetto expected to assume full responsibility by
October 2008. It is possible that Palmetto could adopt different coverage or
payment policies from those of NHIC, and its policies may not include
reimbursement for Oncotype DX or may provide for reimbursement on different
terms than are presently in effect.
Product Pipeline
We are conducting studies with the goal of continuing to expand the clinical
utility of Oncotype DX in breast cancer. We are investigating the utility of
Oncotype DX in patients with ductal carcinoma in situ, or DCIS, which generally
refers to a pre-invasive tumor with reduced risk of recurrence. We plan to
evaluate the use of the Oncotype DX gene panel and also seek to identify other
genes that may be used for treatment planning in DCIS. We are also conducting
studies of Oncotype DX with clinical samples from post-menopausal women with N-,
ER+ breast cancer who were treated with aromatase inhibitors.
We continue to conduct research and development studies in a variety of
cancers other than breast cancer. For example, we have now selected a final set
of genes that have been observed to be statistically significantly correlated to
clinical outcome in colon cancer, which is now undergoing analytical validation.
We expect to begin a clinical validation study for colon cancer in the second
half of 2008. In addition, we initiated a collaboration with Pfizer for the
development of a genomic test to estimate the risk of recurrence following
surgery for patients with Stage I-III renal carcinoma, clear cell type, which is
the most common type of kidney cancer in adults.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of our financial condition and results of
operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as revenues and expenses during
the reporting periods. We evaluate our estimates and judgments on an ongoing
basis. We base our estimates on historical experience and on various other
factors we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
could therefore differ materially from those estimates under different
assumptions or conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our financial
statements.
Revenue Recognition
Our product revenues for tests performed are recognized when the following
revenue recognition criteria are met: (1) persuasive evidence that an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. Criterion (1) is satisfied when we have an agreement or contract with
the payor in place, or when the payor has issued a policy addressing
reimbursement for our Oncotype DX test. Criterion (2) is satisfied when we
perform the test and generate and deliver a Recurrence Score report to the
physician. We exercise judgment in determining when criteria (3) and (4) are
satisfied. We assess whether the fee is fixed or determinable based on the
nature of the fee charged for products or services delivered and contractual
agreements entered into. When evaluating collectibility under any contract or
agreement,, we consider whether we can reliably estimate a payor's individual
payment patterns based upon payment history. Product revenues where all criteria
set forth above are not met are recognized when cash is received from the payor.
Contract revenues are generally derived from studies conducted with
biopharmaceutical and pharmaceutical companies and are recognized on a
contract-specific basis. Under certain contracts, our input, measured in terms
of full-time equivalent level of effort or running a set of assays through our
laboratory under a contractual protocol, triggers payment obligations and
revenues are recognized as costs are incurred or assays are processed. We may
exercise judgment when estimating full-time equivalent level of effort and time
to project completion.
Allowance for Doubtful Accounts
We accrue an allowance for doubtful accounts against our accounts receivable
consistent with historical payment experience. Bad debt expense is included in
general and administrative expense on our consolidated statements of operations.
Accounts receivable are written off against the allowance when the appeals
process is exhausted, when an unfavorable coverage decision is received or when
there is other substantive evidence that the account will not be paid. As of
March 31, 2008 and December 31, 2007, our allowance for doubtful accounts was
$211,000 and $133,000, respectively. Write-offs for doubtful accounts of $7,000
and $254,000 were recorded against the allowance during the three months ended
March 31, 2008 and 2007, respectively. Bad debt expense was $84,000 for the
three months ended March 31, 2008. Changes in our allowance for doubtful
accounts resulted in a $12,000 reduction of bad debt expense for the three
months ended March 31, 2007.
Research and Development Expenses
Research and development expenses are comprised of the following types of
costs incurred in performing research and development activities: salaries and
benefits, allocated overhead and facility occupancy costs, contract services and
other outside costs, and costs to acquire in-process research and development
projects and technologies that have no alternative future use. Research and
development expenses also include costs related to activities performed under
contracts with biopharmaceutical and pharmaceutical companies. Research and
development costs are expensed as incurred.
We enter into collaboration and clinical trial agreements with clinical
collaborators and record these costs as research and development expenses. We
record accruals for estimated study costs comprised of work performed by our
collaborators under contract terms.
All potential future product programs outside of breast and colon cancer are
in the research or early development phase. The expected time frame in which a
test for one of these other cancers can be brought to market is uncertain given
the technical challenges and clinical variables that exist between different
types of cancers. We do not generally record or maintain information regarding
costs incurred in research and development on a program or project specific
basis, including activities performed under contracts with biopharmaceutical and
pharmaceutical companies. Our research and development staff and associated
infrastructure resources are deployed across several programs. Many of our costs
are thus not attributable to individual programs. As a result, we are unable to
determine the duration and completion costs of our research and development
programs or when, if ever, and to what extent we will receive cash inflows from
the commercialization and sale of a product.
Stock-based Compensation Expense
Under the provisions of Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment, or SFAS 123R, our employee stock-based
compensation is estimated at the date of grant based on the fair value of the
award using the Black-Scholes option-pricing model and is recognized as expense
ratably over the requisite service period. The application of SFAS 123R requires
significant judgment and the use of estimates, particularly surrounding
assumptions used in determining fair value. The Black-Scholes valuation method
requires the use of estimates such as stock price volatility and expected option
lives, as well as expected option forfeiture rates, to value stock-based
compensation. We have limited historical evidence with respect to developing
these assumptions. As of January 2008, expected volatility was based on the
historical volatility of our common stock. Prior to January 2008, expected
volatility was based primarily on comparable peer data because our common stock
had been publicly traded for less than three years. The expected life of options
is estimated based on historical option exercise data and assumptions related to
unsettled options. Expected option forfeiture rates are based on historical
data, and compensation expense is adjusted for actual results.
As required under SFAS 123R, we review our valuation assumptions on an
ongoing basis, and, as a result, our valuation assumptions used to value
employee stock-based awards granted in future periods may change. See Note 6,
"Stock-Based Compensation," in the Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more
information.
Results of Operations
Three Months Ended March 31, 2008 and 2007
We recorded a net loss of $6.6 million for the three months ended March 31,
2008 compared to a net loss of $6.9 million for the three months ended March 31,
2007. On a basic and diluted per share basis, net loss was $0.24 for the three
months ended March 31, 2008 compared to $0.28 for the three months ended
March 31, 2007.
Revenues
We derive our revenues from product sales and contract research arrangements.
We operate in one industry segment. Our product revenues are derived solely from
the sale of our Oncotype DX test. Payors are billed upon generation and delivery
of a Recurrence Score report to the physician. Product revenues are recorded on
a cash basis unless a contract or policy is in place with the payor at the time
of billing and collectibility is reasonably assured. Contract revenues are
derived from studies conducted with biopharmaceutical and pharmaceutical
companies and are recorded as contractual obligations are completed.
For the Three Months
Ended March 31,
2008 2007
(In thousands)
Product revenues $ 23,356 $ 13,146
Contract revenues 84 942
Total revenues $ 23,440 $ 14,088
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Total revenues increased to $23.4 million for the three months ended
March 31, 2008 from $14.1 million for the three months ended March 31, 2007.
Product revenues from Oncotype DX increased to $23.3 million for the three
months ended March 31, 2008 from $13.1 million for the three months ended
March 31, 2007. This increase was due primarily to increased adoption, reflected
by a 68% increase in test volume period over period, and expanded reimbursement
coverage, resulting in an increase in the amount recognized per test.
Approximately $11.6 million, or 50%, of product revenue for the three months
ended March 31, 2008 was recorded on an accrual basis and recognized at the time
the test results were delivered, reflecting established payment patterns for
payors with coverage policies in place, compared to $4.6 million, or 35%, of
product revenues for the three months ended March 31, 2007. For both periods,
the balance of product revenue was recognized upon cash collection as payments
were received.
Product revenue from Medicare, which was recorded on an accrual basis, was
$5.7 million, or 24%, of product revenue for the three months ended March 31,
2008, compared to $3.2 million, or 25%, of product revenue for the three months
ended March 31, 2007.
Contract revenues were $84,000 for the three months ended March 31, 2008
compared to $942,000 for the three months ended March 31, 2007. Contract
revenues for the three months ended March 31, 2007 included a one-time payment
of $712,000 for tissue sample processing costs related to our ongoing work with
Bristol-Myers Squibb and ImClone Systems and $168,000 from our collaboration
with sanofi-Aventis and the Eastern Cooperative Oncology Group.
We expect that our product revenues will increase as we process more tests
due to increased adoption of and reimbursement for Oncotype DX related to the
inclusion of Oncotype DX in ASCO and NCCN clinical guidelines and the results of
recent N+ clinical studies. We expect that our contract revenues will continue
to fluctuate based on the number and timing of studies being conducted.
Cost of Product Revenues
For the Three Months
Ended March 31,
2008 2007
(In thousands)
Tissue sample processing costs $ 4,065 $ 2,711
Stock-based compensation 115 79
Total tissue sample processing costs $ 4,180 $ 2,790
License fees 1,704 1,057
Total cost of product revenues $ 5,884 $ 3,847
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Cost of product revenues represents the cost of materials, direct labor,
equipment and infrastructure expenses associated with processing tissue samples
(including histopathology, anatomical pathology, paraffin extraction, reverse
transcription polymerase chain reaction, or RT-PCR, quality control analyses and
shipping charges to transport tissue samples) and license fees. Infrastructure
expenses include allocated facility occupancy and information technology costs.
Costs associated with performing our test are recorded as tests are processed.
Costs recorded for tissue sample processing represent the cost of all the tests
processed during the period regardless of whether revenue was recognized with
respect to that test. License fees for royalties due on product revenues and
contractual obligations are recorded in cost of product revenues at the time
product revenues are recognized or in accordance with other contractual
obligations. License fees represent a significant component of our cost of
product revenues and are expected to remain so for the foreseeable future.
Cost of product revenues increased to $5.9 million for the three months ended
March 31, 2008 from $3.8 million for the three months ended March 31, 2007. Test
volume increased 68% period over period, driving the $1.4 million, or 50%,
increase in tissue sample processing costs. The $647,000 increase in license
fees included higher royalties due to an increase of $10.2 million, or 78%, in
product revenues recognized. We expect the cost of product revenues to increase
as we continue to process more tests.
Research and Development Expenses
For the Three Months
Ended March 31,
2008 2007
(In thousands)
Personnel-related expenses $ 3,750 $ 2,540
Stock-based compensation 735 393
Collaboration expenses 76 684
Infrastructure and all other costs 1,844 1,553
Total research and development expenses $ 6,405 $ 5,170
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Research and development expenses increased to $6.4 million for the three months ended March 31, 2008 from $5.2 million for the three months ended March 31, 2007. The $1.2 million increase in research and development expenses was primarily due to a $1.2 million increase in personnel-related expenses, a $342,000 increase in stock-based compensation and a $291,000 increase in infrastructure and other expenses, partially offset by a $608,000 decrease in collaboration expenses related to the timing of our clinical research projects. We expect that our research and development expenses will continue to increase as we increase investment in our product pipeline for a variety of cancers, including cancers other than breast and colon.
Selling and Marketing Expenses . . . |
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