Genomic Health (NASDAQ:GHDX) reports earnings tomorrow. The results come off a solid second quarter, where a 17% increase in testing volume helped pushed total revenue up 11%, as Rule Breakers analyst Karl Thiel pointed out last quarter.
Here are three things to watch when the diagnostic testing company reports.
Growth in DCIS
DCIS, that's ductal carcinoma in situ, for those of you playing acronym bingo, is an early, non-invasive form of breast cancer that's confined to the milk ducts. Without treatment beyond having the tumor removed, most wouldn't have any reoccurrence of the tumor at the same site, but about 80% of women choose to have additional treatment because it's been hard to tell which patients might have their tumor come back. Better safe than sorry, even if "safe" means shooting radiation beams through your body, which might be better than seeing the breast cancer return, but not by much.
Genomic Health's Oncotype DX DCIS Score was validated a few years ago, but new data from a larger set of 1,200 tumor samples confirmed and extended the tests' ability to predict the risk of local recurrence was completed in June. We'll get to see the full data when it's presented at a scientific meeting in December, but the top-line result may be enough to increase its use already.
As the U.S. market for breast cancer matures, growth will need to come from overseas patients. International sales were up 29% in the second quarter, showing just how dependent Genomic Health has become on the new revenue stream, since overall revenue was only up 11%. International sales only represented 17% of product revenue in the second quarter, so there's still plenty of room for growth.
Unfortunately, those tests may be coming at a lower price, as the number of international tests performed in the second quarter increased 32% year over year compared to the aforementioned 29% increase in international revenue. That's something to keep an eye on, although it's not like Genomic Health can avoid regions that demand lower prices just to keep margins high. Gross profit increased 10% year over year, despite the slightly lower gross margins.
It's a topic Genomic Health will never be able to shake, because even as reimbursement for its breast cancer test has become available, the company launched into international markets, where it has to gain reimbursement, and launched its prostate cancer test, which also needs to gain U.S. reimbursement.
Genomic Health has discounted the price of the tests for those without reimbursement, which is the smart long-term strategy because it gets doctors using its tests. But the lower price comes with lower margins in the short term. Genomic Health estimates that sales of the prostate cancer test, where there's no reimbursement, knocked about one percentage point off gross margins, and could knock it down another point as it increases sales. Still with gross margins currently at 83%, the company can afford some discount now without losing its shirt.
Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Genomic Health and owns shares of the company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.