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| GHDX > SEC Filings for GHDX > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
the impact changes in healthcare policy or regulation could have on our
business; the adequacy of our product liability insurance; our ability to
recognize revenues other than on a cash basis; the level of investment in our
sales force and our expectations regarding future hiring of sales personnel; the
capacity of our commercial laboratory to process tests and our expectations
regarding future capacity; our dependence on collaborative relationships and the
success of those relationships; whether any tests will result from our
collaborations; our business strategy and our ability to achieve our strategic
goals; our belief that multi-gene analysis provides better analytical
information than traditional methods; our belief regarding the timing of a
clinical validation study and commercialization of a potential test for colon
cancer; our expectations regarding clinical development processes future tests
may follow; the applicability of clinical results to actual outcomes; our
estimates and assumptions with respect to disease incidence; the ability of our
test to impact treatment decisions; our beliefs regarding the benefits of a
report specific to N+ patients; our beliefs regarding the benefits of individual
gene reporting and other enhancements to Oncotype DX and the timing of any
enhancements; our plans with respect to potential tests for ductal carcinoma in
situ, or other cancers or for patients treated with aromatase inhibitors or
other treatments; the economic benefits of our test to the healthcare system;
our compliance with federal, state and foreign regulatory requirements; our
expectations regarding levels of product and contract revenues; how we intend to
spend our existing cash and cash equivalents and how long we expect our existing
cash to last; our expected future sources of cash; our plans to borrow
additional amounts under existing or new financing arrangements; the potential
impact resulting from the regulation of Oncotype DX by the U.S. Food and Drug
Administration, or FDA, and our belief that Oncotype DX is properly regulated
under the Clinical Laboratory Improvement Amendments of 1988, or CLIA; the
impact of new or changing regulation or legislation on our business; our plans
to pursue reimbursement on a case-by-case basis; our ability, and expectations
as to the amount of time it will take, to achieve successful reimbursement from
third-party payors and government insurance programs; our intent to expand our
presence in foreign markets, including both direct investment and additional
foreign distribution arrangements; the benefits of our technology platform; our
beliefs regarding our competitive benefits; the factors that we believe will
drive the establishment of coverage policies; the impact of changing interest
rates; the impact the economic and financial situation may have on our business,
our assets or our ability to obtain capital; the amount of 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 or studies; our ability to obtain
reimbursement coverage for N+ patients or in countries outside the United
States; 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, judgements 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; the economic environment; 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 July 1, 2008, we
increased the list price of our test from $3,650 to $3,820.
Adoption and Reimbursement
For the three and nine months ended September 30, 2008, more than 10,220 and
29,060 test reports were delivered for use in treatment planning, respectively,
compared to more than 5,950 and 17,150 test reports for the three and nine
months ended September 30, 2007, respectively. As of September 30, 2008, more
than 75,000 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 demand, 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 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
September 30, 2008, our laboratory had the capacity to process up to 14,000
tests per quarter.
We have recently expanded the clinical utility of Oncotype DX. In
September 2008, we introduced quantitative gene expression reporting for the
human epidermal growth factor receptor 2, or HER2, gene with the Oncotype DX
report to provide additional information for clinical decision making. In
February 2008, we introduced quantitative gene expression reporting for estrogen
receptor, or ER, and progesterone receptor, or PR, genes with the Oncotype DX
report. 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 September 2008 American Society of
Clinical Oncologists Breast Cancer Symposium, we presented results from two
studies supporting the use of Oncotype DX in assessing HER2 gene expression. In
June 2008, the Journal of Clinical Oncology published results of a study
demonstrating the utility of Oncotype DX in measuring gene expression for ER and
PR status, indicating that quantitative reverse transcription polymerase chain
reaction, or RT-PCR, is a reliable method for determining hormone receptor
status in breast cancer. 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 limited to 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 October 2008, Cigna HealthCare, Humana, Inc., Health Net, Inc., United
HealthCare Insurance Company, Aetna, Inc., Kaiser Foundation Health Plan, Inc.,
Wellpoint, Inc. and Palmetto Government Benefits Administrators, or Palmetto
GBA, 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. In
January 2008, Medi-Cal became the first Medicaid agency to establish a policy
covering our test. In addition, a number of regional payors, including many
regional Blue Cross and Blue Shield plans, have issued policies authorizing
coverage for Oncotype DX. As of October 2008, more than 89% of all U.S. insured
lives were covered by health plans that provide reimbursement for Oncotype DX
through contracts, agreements or policy decisions.
We continue to expand our commercial efforts outside of the United States.
During the three months ended September 30, 2008, we established exclusive
distribution agreements for Oncotype DX in Australia and Taiwan. These are in
addition to existing distribution agreements established in Israel, Japan, the
United Kingdom, Greece and Turkey. In September 2008, the Dutch Institute for
Healthcare issued updated clinical practice guidelines that included the use of
Oncotype DX for breast cancer patients. We are continuing work on a study
supporting Japanese investigators as they gain clinical experience with Oncotype
DX for early-stage breast cancer patients.
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 breast cancer patients who
were treated with aromatase inhibitors and expect to report results from these
studies in late 2008.
We continue to conduct research and development studies in a variety of
cancers other than breast cancer. For example, we selected a final set of genes
that have been observed to be statistically significantly correlated to clinical
outcome in Stage II colon cancer. We continue to make progress toward a clinical
validation study for colon cancer and expect to report results in 2009. We do
not currently expect to commercialize a test for colon cancer until the second
half of 2009 or the first half of 2010 at the earliest. In addition, we began
gene identification work under our 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. We also established collaborations and
identified sources of clinical samples in connection with our prostate and lung
cancer programs.
Current Economic Environment
Recently, concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining real
estate market in the U.S. have contributed to increased volatility and
diminished expectations for the global economy and expectations of slower global
economic growth going forward. These factors, combined with volatile oil prices,
declining business and consumer confidence and increased unemployment, have
precipitated an economic slowdown and fears of recession. We have evaluated the
impact of this environment on our cash management, cash collection activities
and volume of tests delivered.
At September 30, 2008, we had cash, cash equivalents and short-term
investments of $54.4 million compared to $68.4 million at December 31, 2007. In
accordance with our investment policy, available cash is invested in short-term,
low-risk, investment-grade debt instruments. Our cash and short-term investments
are held in a variety of interest-bearing instruments including money market
accounts, obligations of U.S. government-sponsored entities, high-grade
corporate bonds and commercial paper. At September 30, 2008, our holdings of
obligations of U.S. government-sponsored entities consisted entirely of debt
securities issued by the Federal Home Loan Bank, or FHLB, the Federal National
Mortgage Association, or FNMA, and the Federal Home Loan Mortgage Corporation,
or FHLMC. To date we have not experienced a loss of principal on any of our
investments, and we expect that our ability to access or liquidate these
investments as needed to support our business activities will continue. We have
also reviewed the financial position of our significant third-party payors,
which include Medicare and managed care companies. Based upon this review, we do
not expect the current economic environment to have a negative impact on our
ability to collect payments from our third-party payors in the foreseeable
future. The current economic slowdown could negatively impact the volume of
tests we deliver if patients lose healthcare coverage, delay medical checkups or
are unable to pay for our test.
We will continue to assess the impact of the current economic environment on
our business activities. If the economic climate in the U.S. does not improve or
continues to deteriorate, our cash position, cash collection activities and
volume of tests delivered could be negatively impacted and we could experience
lower revenues.
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
We exercise judgment in determining whether revenue is recognized on an
accrual basis when test results are delivered or on a cash basis when cash is
received from the payor. Our revenues for tests performed are recognized when
the following criteria are met: (1) persuasive evidence that an arrangement
exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. We assess whether
the fee is fixed and determinable based on the nature of the fee charged for the
products or services delivered and existing contractual agreements. When
evaluating collectibility, we consider whether we have sufficient history to
reliably estimate a payor's individual payment patterns. Based upon at least
several months of payment history, we review the number of tests paid against
the number of tests billed and the payor's outstanding balance for unpaid tests
to determine whether payments are being made at a consistently high percentage
of tests billed and at appropriate amounts given the contracted payment amount.
To the extent all criteria set forth above are not met when test results are
delivered, product revenues are recognized on a cash basis 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, revenues are recognized as
costs are incurred or assays are processed. We may exercise judgment when
estimating full-time equivalent level of effort, costs incurred and time to
project completion. For certain contracts, we utilize the performance-based
expected revenue method of revenue recognition, which requires that we estimate
the total amount of costs to be expended for a project then recognize revenue
equal to the portion of costs expended to date. The estimated total costs to be
expended are necessarily subject to revision from time-to-time as the underlying
facts and circumstances change.
Allowance for Doubtful Accounts
We accrue an allowance for doubtful accounts against our accounts receivable
based on estimates consistent with historical payment experience. Our allowance
for doubtful accounts is evaluated quarterly and adjusted when trends or
significant events indicate that a change in estimate is appropriate. As of
September 30, 2008 and December 31, 2007, our allowance for doubtful accounts
was $630,000 and
$133,000, respectively.
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.
Prior to January 1, 2008, we recognized non-refundable advance payments for
goods and services to be used for future research and development activities as
an expense when payments were made. Beginning January 1, 2008, these payments
are deferred and capitalized and recognized as an expense as the goods are
delivered or the related services are performed in accordance with Emerging
Issues Task Force Issue No. 07-3, "Accounting for Non-Refundable Payments for
Goods or Services Received for Use in Future Research and Development
Activities", or EITF 07-3. As a result of our adoption of EITF 07-3, our
research and development collaboration expenses and net loss decreased by
$313,000 and $575,000 for the three and nine months ended September 30, 2008,
respectively. Our net loss per share decreased by $0.01 and $0.02 for the three
and nine months ended September 30, 2008, respectively. We expect to recognize
these deferred and capitalized amounts as expense in future periods as the
related services are delivered.
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. In 2008, we began maintaining information regarding costs
incurred for activities performed under certain contracts with biopharmaceutical
and pharmaceutical companies. However, we do not
generally record or maintain information regarding costs incurred in research
and development on a program-specific basis. 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. As of January 2008, our assumptions regarding expected volatility
are based on the historical volatility of our common stock. Prior to
January 2008, our assumptions regarding expected volatility were based primarily
on comparable peer data because our common stock had been publicly traded for
less than two 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 September 30, 2008 and 2007
We recorded a net loss of $3.0 million for the three months ended
September 30, 2008 compared to a net loss of $7.3 million for the three months
ended September 30, 2007. On a basic and diluted per share basis, net loss was
$0.11 for the three months ended September 30, 2008 compared to $0.26 for the
three months ended September 30, 2007.
Revenues
We derive our revenues primarily from product sales and, to a lesser extent,
from 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.
Total revenues increased to $28.1 million for the three months ended
September 30, 2008 from $15.9 million for the three months ended September 30,
2007. Product revenues from Oncotype DX increased to $28.1 million for the three
months ended September 30, 2008 from $15.8 million for the three months ended
September 30, 2007. This increase was due primarily to increased adoption of our
test, reflected by a 72% increase in test volume period over period, and
expanded reimbursement coverage, resulting in an increase in the amount
recognized per test. Approximately $14.6 million, or 52%, of product revenues
for the three months ended September 30, 2008 were recorded on an accrual basis
and recognized at the time the test results were delivered, compared to
$4.8 million, or 31%, of product revenues for the three months ended
September 30, 2007. For both periods, the balance of product revenues was
recognized upon cash collection as payments were received.
Product revenues from Medicare were $6.0 million, or 21% of product revenues,
for the three months ended September 30, 2008, compared to $3.3 million, or 21%
of product revenues, for the three months ended September 30, 2007. Product
revenues from United HealthCare Insurance Company were $2.6 million, or 9% of
product revenues, for the three months ended September 30, 2008, compared to
$3.0 million, or 19% of product revenues, for the three months ended
September 30, 2007.
Contract revenues were $51,000 for the three months ended September 30, 2008 compared to $120,000 for the three months ended September 30, 2007. Contract revenues reflected our continued collaboration with pharmaceutical partners to . . .
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