In February, Genomic Health (NASDAQ:GHDX) made it clear that the company wouldn't see an operating profit until the fourth quarter, so it should come as no surprise that the cancer-test maker lost $9.2 million in the second quarter.
Revenue was flat year over year, increasing by just 0.1 million compared with the year-ago quarter. At constant currency, revenue would have grown 2% year over year, but that's just a consolation prize.
The problem, as it has been for the past few quarters, is that Genomic Health's U.S. breast cancer test grew just 3% year over year. Genomic Health has a vast majority of the U.S. breast cancer test market, so the focus has turned to convincing doctors that aren't using any genomic tests to start using Genomic Health's Oncotype DX Breast Cancer test.
Genomic Health has other tests that are growing much faster, but it's typically not getting reimbursed for them yet -- thus the guidance for profitability in the fourth quarter.
Combined, the number of tests delivered in the second quarter increased 8% year over year. And the number of tests ordered by physicians during the quarter increased 12%, although timing didn't allow Genomic Health to process them all, thus the discrepancy in the two numbers.
The increase in the number of tests performed came on the back of a doubling of the number of prostate cancer tests delivered. The number of tests for ductal carcinoma in situ, or DCIS, an early non-invasive tumor found in the milk ducts of women's breasts, climbed 80% year over year.
The prostate cancer test has almost no reimbursement, and DCIS reimbursement is spotty, thus the lack of an increase in revenue despite the solid growth. Tests performed internationally, where reimbursement is also spotty, increased 13% year over year, which didn't really help the profitability situation either.
The reimbursement landscape is improving, though. In the UK, Genomic Health's breast cancer test is now being reimbursed. The company has contracts with Trusts that cover 40% of the population, which should increase as the year progresses.
Medicare has already given an initial draft guidance to reimburse for the prostate cancer test, which Genomic Health believes will be finalized in the fourth quarter. More than 40% of the prostate cancer test volume comes from men covered by Medicare, so reimbursement will increase sales substantially and be the main driver toward profitability in the fourth quarter.
Finally for DCIS, Genomic Health hopes that new data will spur more insurers to cover the test. A second validation study was recently published that confirms the DCIS test is a good predictor of local recurrence, and a separate study showed the test can help doctors better decide whether radiation is necessary after surgery, potentially saving insurers money.
Management lowered revenue guidance by $3 million on either end of the range because of changes in currencies but left expectations for the number of tests it expects to perform this year unchanged at 102,000 to 109,000, about a 10% increase over 2014 at the midpoint.
Genomic Health now expects revenue of $289 million to $302 million for the year. At the low end of guidance, that calls for 8.7% year-over-year growth in the second half of the year, but with the Medicare reimbursement pushed into the fourth quarter, the growth will be lumpy as we wait for profitability in the fourth quarter.
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.
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