Inside the Lab Industry: Big Growth, Little Profit Is the Current Story for Esoteric Firms

While traditional reference laboratory testing has been under pressure due to cutbacks in reimbursements from government and commercial payers, it has been a different story for the publicly traded labs that perform specialty molecular and esoteric testing. That was borne out in the most recent earnings reports, which indicated a broad section of esoteric and molecular labs reporting significant growth in their revenue. However, the bottom lines of these labs remained a mixed bag. Virtually all of the companies reported ongoing losses, some of which have doubled over the past year. None have provided guidance as to when they might enter profitability. On the Way Up One of the biggest performers of the third quarter was Redwood City, Calif.-based Genomic Health, which saw revenue for the third quarter increase 13 percent, to $65.7 million from $58.4 million from the third quarter of 2012. The company attributed the growth to a widespread acceptance of its tests for prostate and breast cancer. It was also among a few of the smaller esoteric testing firms to report a profit, although it was a minuscule $488,000, down from $3.7 million in the year-ago quarter. Despite the narrowed profit—and a loss of $3.4 million for the first nine months of 2013—the numbers still beat expectations of some stock analysts. Analysts Amanda Murphy and J.P. McKim of the firm William Blair had forecast revenue of $64 million and a loss of about $500,000. As a result, they upgraded Genomic Health to outperform and predicted the company would report year-end revenue of $263 million, about $5 million higher than their original forecasts. Another firm that performed strongly was San Diego-based Sequenom. It reported a near doubling of revenues for the third quarter to $44 million, up from $22.9 million in the third quarter of 2012. Revenue for its diagnostic tests nearly tripled, to $33.3 million from $12.5 million. Test volume increased 87 percent from quarter over quarter due to the increased uptake of the company’s MaterniT21 PLUS noninvasive prenatal test. The assay can be used in lieu of amniocentesis, which can place some fetuses at risk. Sequenom’s rise in revenue came despite a warning issued by the company that it is still not getting paid in a timely manner from some payers due to the Centers for Medicare and Medicaid Services still not putting a cogent payment system for molecular tests into full effect. It reported a net loss for the quarter of $28.1 million, down slightly from the $30.2 million loss reported for the second quarter of 2012. The company has not issued any forecasts as to when it would become profitable. Another company that reported a big gain in revenue was Miami-based OPKO Health. It reported third-quarter revenue of $20.6 million for the quarter, compared to $11.8 million in the third quarter of 2012. However, it also reported a net loss for the quarter of $60.2 million, up considerably from the $10.2 million loss reported in the year-ago quarter.

Esoteric Lab Results, First Nine Months of 2013
Company	Revenue, First Nine Months of 2013	Revenue, First Nine Months of 2012	2013 Net Income for Period	2012 Net Income for Period
Genomic Health	$192.8 million	$174.7 million	-$3.3 million	$6.3 million
Interleukin Genetics	$1.8 million	$1.9 million	-$5.2 million	-$3.9 million
Sequenom	$117.3 million	$56 million	-$88.5 million	-$84.3 million
OPKO	$75.8 million	$30.8 million	-$98 million	-$30.2 million
Foundation Medicine	$19.3 million	$5.5 million	-$30 million	-$16.8 million
Atossa Genetics	$585,345	$383,346	-$8 million	-$3.4 million
Transgenomic	$21.3 million	$24.2 million	-$12 million	-$6 million
Sources: Company Reports

  OPKO, which plans to launch a test early next year to more reliably predict the risk for prostate cancer, attributed more than $47 million of the loss to accounting changes linked to the early conversion of senior notes that were not set to mature until 2033. Cambridge, Mass.-based Foundation Medicine also reported a big increase in revenue, which jumped to $8.2 million for the quarter from just $3 million during the third quarter of 2012. The company said the health care sector was quickly adopting FoundationOne, its biomarker assay for solid cancerous tumors. “We are very encouraged by the commercial traction as the utility of FoundationOne and the information it delivers garners growing recognition among oncologists, pathologists, and pharmaceutical companies,” said Michael Pellini, M.D., Foundation’s chief executive officer. However, Foundation also posted a loss of $12.5 million for the quarter, more than double the $5.6 million loss it reported in the year-ago quarter. Treading Water—Or Worse Not every one of the esoteric firms that recently reported earnings has been experiencing dramatic growth. Waltham, Mass.-based Interleukin Genetics reported revenue for the third quarter of $419,000, unchanged from the third quarter of 2012. The company reported a loss of $2.2 million, nearly double from the loss of $1.3 million reported in the year-ago quarter. The company focuses primarily on genetic testing for dental and oral diseases. It expects its latest test will be covered by dental payers beginning in early 2014. Omaha, Neb.-based TransGenomic reported a drop in revenue for the third quarter, to $6.6 million from $7.9 million in the third quarter of 2012, including a reduction in laboratory service volume. It also reported that its loss had doubled, to $5.6 million from $2.8 million. Partly in response to its ongoing struggles, TransGenomic replaced its chief executive officer in September, appointing Paul Kinnon, a longtime consultant to the firm. Kinnon said he would focus on boosting sales of its diagnostic tests, which focus on genetic anomalies. The company recently inked deals with PerkinElmer to distribute its oncology assays outside of the United States and PDI Inc. to market its tests to better predict the efficacy of certain cardiac drugs. “The new commercialization agreements . . . highlight our renewed vigor and corporate strategy, which aims to optimize, through channel partnerships, the commercial potential of these strong assets while focusing our internal resources on our areas of strength,” Kinnon said. Atossa Genetics, the Seattle-based firm that has developed a breast cancer detection test, said in its most recent earnings report that it is inching toward obtaining Food and Drug Administration (FDA) reapproval for its assay, which is known as ForeCYTE. The ForeCYTE assay and another Atossa product, the Mammary Aspiration Specimen Cytology Test, was voluntarily recalled early last month after the FDA raised concerns about marketing claims made in connection with the tests, as well as some of the accompanying instructions. The company reported revenue for the quarter of $76,597, down nearly 30 percent from the $105,576 reported for the third quarter of 2012. Its net loss of $3.5 million was more than triple the $1.1 million net loss reported in the year-ago quarter. Atossa recently renegotiated a deal with one of its investors, Aspire Capital LLC, to obtain additional capital. The two parties reached terms on a $25 million stock buyback deal, helping to more than Atossa’s cash balance compared to the second quarter of 2013. “With cash and cash equivalents of $7.7 million on our balance sheet at the end of the third quarter and a new financing agreement in place with Aspire Capital, we believe we are well positioned going into 2014,” said Steven C. Quay, M.D., Atossa’s chief executive officer. “We are addressing the FDA’s regulatory requirements so that we can resume the national rollout of the ForeCYTE test at the earliest possible date.” Takeaway: Although growth among the labs focusing on esoteric molecular testing is widespread, it could be an indefinite period of time before they begin entering  profitability.