Genomic Health (NASDAQ: GHDX) managed to post its 10th consecutive quarter of improving earnings , but more importantly, the cancer-test maker appears to be at an inflection point where revenue growth will accelerate, helping the bottom line increase substantially.
Genomic Health results: The raw numbers
|Metric||Q4 2017||Q4 2016||Year-Over-Year Change|
|Revenue||$87.5 million||$82.7 million||5.7%|
|Income from operations||$2.15 million||$1.49 million||44%|
|Earnings per share||$0.05||$0.04||25%|
Data source: Genomic Health.
What happened with Genomic Health this quarter?
- Genomic Health delivered more than 31,990 Oncotype tests during the quarter, up 7% year over year.
- The prostate cancer test continues its solid launch, with test volume up 33% and revenue up 39% as the company gets reimbursed for more of the tests. Genomic Health estimates it has about 20% of the overall prostate cancer market and is the leader of adoption for patients with low and intermediate-risk prostate cancer.
- Unfortunately, despite the solid growth, prostate cancer test revenue only contributed $5 million in the quarter, so it doesn't move the overall revenue line that much. New guidelines published by the National Comprehensive Cancer Network, which recommend doctors consider molecular testing for men with low- and favorable intermediate-risk prostate cancer, should help boost the overall market for prostate cancer tests.
- Management didn't break out the fourth-quarter numbers for the U.S. breast cancer test, which make up the bulk of revenue, but noted that the fourth quarter was the strongest quarter for growth in the year -- a year in which breast cancer test volume increased 3%.
- Internationally, revenue was up 14% year over year in the fourth quarter, adding $13.7 million. Test volume was only up 3%, but that was largely due to a decision to require reimbursement in Germany. Excluding Germany from the numbers, international test volume was up 10%.
- Economies of scale helped turn more of the extra revenue into income, allowing the bottom line to grow faster than the revenue line.
- The company made a couple of deals at the end of the year: a multiyear research collaboration with Johnson & Johnson 's (NYSE: JNJ) Janssen Pharmaceuticals, to evaluate the Oncotype DX GPS test with Johnson & Johnson's prostate cancer drug pipeline, and a licensing agreement with Cleveland Diagnostics, to develop and commercialize a high-PSA reflex test to improve the diagnosis of prostate cancer.
- This quarter, the company launched the Oncotype DX AR-V7 Nucleus Detect, a liquid biopsy test to help doctors pick the best treatment for patients with metastatic castration-resistant prostate cancer.
- Genomic Health decided to stop development of the Oncotype SEQ Liquid Select test and other tests based on next-generation sequencing panels, which will result in a $10 million charge in the first quarter. While it's clearly disappointing to have wasted the resources, Genomic Health sees a bigger opportunity to move its current tests onto Biocartis Group's Idylla platform, which should help with future growth -- especially internationally, where it's easier to get reimbursement on Biocartis' system.
What management had to say
Kim Popovits, Genomic Health's chairman, CEO, and president, pointed to three sources of growth in the (previously fairly stagnant) market in the U.S. for invasive breast cancer diagnostics:
In our core U.S. invasive breast cancer business, where we have 60% market penetration, three key catalysts position us to drive higher utilization and revenue, including the recent implementation of AJCC [see below] breast cancer staging criteria, which named Oncotype DX specifically; PAMA [see below] market-based pricing, representing more than a 10% increase to our Medicare rate, or an estimated $6 million to $8 million to the top line in 2018; and likely the most important, the expected near-term readout of the TAILORx intermediate results.
For those filling out your acronym bingo cards at home, that's:
- AJCC : American Joint Committee on Cancer, a group that advises doctors on how to determine what stage a tumor is at. AJCC is recommending using Oncotype DX as one of the tests to help determine the course of treatment.
- PAMA : Protecting Access to Medicare Act, a law that will increase Genomic Health's Medicare reimbursement rate.
- TAILORx : Trial Assigning IndividuaLized Options for Treatment (Rx), a clinical trial testing molecular profiling to help determine the best treatment course for breast cancer patients.
For a little more context on TAILORx, Popovits added:
As a reference point, when the secondary endpoint of TAILORx in patients with recurrence scores less than 11 was published in The New England Journal of Medicine in 2015, we saw a 5% increase in tests delivered. We expect the results for patients with recurrence scores of 11 to 25 to be reported by study investigators in the first half of this year.
Assuming everything coming together with the U.S. breast cancer market, continued growth of the prostate cancer market, and a successful launch of the Oncotype DX AR-V7 test, management thinks revenue will increase by 10% to 15% this year. However, that includes a new ASC 606 accounting standard, which will reduce revenue by about 2.5%, but won't have any effect on earnings.
Looking at the bottom line, adjusted net income is expected to be in the range of $14 million to $20 million, up substantially from the $0.4 million in adjusted net income last year.
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