Genomic Health, Inc.'s Lumpy Growth

After a couple of quarters of strong year-over-year growth, the third quarter wasn't as kind to Genomic Health (GHDX).

The company sells a few tests, called Oncotype DX, that help doctors understand the characteristics of a patients' tumor, allowing the doctors to pick the best treatment for the patient.

Because reimbursement usually comes well after the test is launched, it's important to track both test volume and revenue. Growth of both slowed in the third quarter.

Source: Company releases.

The culprit in the slow appears to be international revenue, which grew at a whopping 29% year over year in the second quarter, but growth dropped to just 12% year over year in the third quarter. Growth in Western Europe was strong at nearly 20%, but intermittent public funding for tests in the U.K. brought down international growth.

The U.K.'s National Institute for Health and Care Excellence made an exclusive recommendation for Oncotype DX, but the National Health Service, or NHS, which actually runs the public health system in the U.K., has been slow to establish a reimbursement pathway.

"NHS is used to funding products, not services, so it's been a learning process for all of us," G. Bradley Cole, Genomic Healths CFO and COO told investors on the conference call.

Genomic Health's newest test for prostate cancer saw testing volume double in the third quarter, and now makes up 6% of all tests. But its contribution to total revenue is likely considerably less as Genomic Health doesn't have insurer coverage for the test yet.

It's that lack of insurer coverage and the increase in international markets -- where test prices are lower -- that's caused revenue growth to trail test volume growth. If you look at just the U.S. breast cancer test market, the opposite is true, as the average test price has increased and the company is able to make insurers pay for tests the company has a ready performed.

All told, Genomic Health lost just $6.3 million in the third quarter. It's important to keep in mind that the loss is due to prostate cancer tests and research and development expenses. If you just look at the worldwide breast cancer market, the franchise is profitable.

The key to profitability in prostate cancer comes from reimbursement. The listing of the test as an option on the National Comprehensive Cancer Network's prostate cancer clinical guidelines should help. With half of prostate cancer patients covered by Medicare, coverage will help sales of prostate cancer testing substantially.

The company should also be able to increase usage and insurance coverage for ductal carcinoma in situ, or DCIS, after its DCIS breast cancer validation study is presented at the San Antonio Breast Cancer Conference Symposium in December.

As prostate, DCIS, and international tests gain reimbursement and increase sales, Genomic Health will become profitable. The company is shooting for some profitable quarters next year, and a full year of profitability in 2016.