Inside the Lab Industry: Genomic-Oriented Labs Continue Swift Growth

While the national laboratories and labs performing routine testing continue to struggle with flat test volumes and revenue growth, those labs focused on genomic and molecular medicine are seeing their revenues grow steadily. Fourth-quarter and final year earnings reports from four publicly traded molecular-focused enterprises—NeoGenomics, Genomic Health, Foundation Medicine, and Sequenom—showed that all enjoyed significant year-over-year revenue growth. Those that are in the black saw their bottom lines grow. Indeed, the financial landscapes between molecular and traditional labs are stark. Amanda Murphy and J.P. McKim, analysts with William Blair & Co., issued an outperform rating for several molecular specialty labs, including NeoGenomics and Genomic Health, even though they noted uncertainty remained regarding the full resolution of payment for molecular tests using new molecular pathology codes. In the meantime, Murphy and McKim kept in place market perform ratings for LabCorp, Quest Diagnostics, and Bio-Reference Labs. “Labs have also given weaker-than-expected fiscal 2014 guidance, primarily as a result of government-driven reimbursement challenges, while volume growth expectations suggest a continued muted (albeit not worsening) environment,” they wrote. “No company is incorporating a meaningful utilization benefit from reform and most are assuming an increase in bad debt as a result of increased patient cost sharing.” Cambridge, Mass.-based Foundation Medicine showed particularly strong business growth. For the fourth quarter, ending Dec. 31, it reported a net loss of $13.1 million. However, revenue was $9.7 million, nearly 90 percent higher than the $5.2 million reported for the year-ago quarter. The company lost $42.9 million for calendar 2013 on revenue of $29 million. The loss was much higher than the $22.4 million reported in 2012. However, revenue was up more than 180 percent compared to the $10.6 million reported in 2012. Foundation Medicine Chief Executive Officer Michael J. Pellini, M.D., noted that the company also reaped additional revenues from its second molecular test product, FoundationOne Heme, which provides a genomic profile for hematological cancers such as leukemia, lymphoma, and myeloma. “The response from hematologists and oncologists indicates this product will be important in providing comprehensive genomic profiling for patients with hematologic malignancies, sarcomas, and pediatric cancers,” he said. The Fort Meyers, Fla.-based NeoGenomics turned a corner on profitability. It reported net income of $857,000 on revenue of $18.3 million for the fourth quarter of 2013, driven by a 28 percent growth in test volume. That compares to a loss of $113,000 on revenues of $14.9 million for the year-ago quarter. For all of 2013, NeoGenomics reported net income of $2 million on revenue of $66.5 million. That compares to essentially breakeven—$65,000 in income—on revenue of $59.9 million in 2012. “Despite continued pressure on reimbursement, we achieved strong revenue growth and sharply increased gross margins,” said NeoGenomics Chief Executive Officer Douglas VanOort. “Our stream of innovative new tests and consistently high service levels is attracting new clients, and we are gaining market share. We have also been successful at increasing productivity and reducing costs.” That’s despite revenue per test declining by 3.7 percent.

Stock Prices of Genomic/Molecular Oriented Laboratories
Company	Stock Price, March 2014	Stock Price, March 2013
Sequenom	$4.36	$2.37
Foundation Medicine	$3.30	$3.50
Genomic Health	$29.03	$26.41
NeoGenomics	$3.30	$3.58
Illumina	$52.22	$171.49
Source: Financial Reports

  However, there are some potential clouds on the horizon. William Blair’s Murphy and McKim noted that uncertainties regarding how Medicare will allow labs to bill for multiple fluorescence in situ hybridization procedures could cut NeoGenomics’ revenue by $3 million, or as much as 4 percent, in 2014. Redwood City, Calif.-based Genomic Health reported a loss of $9.4 million for the fourth quarter on revenue of $67.1 million. That compares to net income of $2.1 million for the year-ago quarter, on revenue of $60 million. The loss was attributable in part to a $9 million up-front licensing payment. For calendar 2013, Genomic Health lost $12.4 million, compared to net income of $8.2 million in 2012. However, revenue increased 11 percent to $259.2 million, from $233.5 million. Genomic Health Chief Executive Officer Kim Popovits said test volumes had grown 15 percent last year. “Given the strength in our core business, the successful launch of our Oncotype DX prostate cancer test, and recent international progress, we plan to accelerate our investment to further the clinical practice of genomic medicine in cancer,” Popovits said. Genomic Health forecasts it will perform between 98,000 and 102,500 Oncotype DX tests for the calendar year, up slightly from the Wall Street consensus of about 93,000. San Diego-based Sequenom reported a net loss for its fourth quarter of $18.9 million. However, that was a significant improvement over the $32.8 million loss in the fourth quarter of 2012. Revenue for the quarter was $45.1 million, compared to $33.7 million for the year-ago quarter. For the entire calendar year, Sequenom reported a net loss of $107.4 million on revenue of $119.6 million. For 2012, the company lost $117 million on $46.5 million. A restructuring that took place last August cut selling and marketing expenses significantly. “We made significant progress in our performance during 2013, with 157 percent growth in diagnostic services revenue as our collections and revenue improved during the year and our overall cash burn declined in the last half of the year,” said Sequenom Chief Financial Officer Paul V. Maier. “We look forward to continued growth in 2014 as we improve our collection results following the coding changes adopted at the beginning of 2013 and continue to increase our volume of tests performed.” The company informally projects reaching breakeven and positive cash flow by the end of the calendar year. Other firms with a more peripheral role in genomic assays are also benefiting from the testing boom. San Diego-based Illumina, which mostly provides the sector with sequencing equipment but also offers a handful of assays, reported significant growth. It reported net income of $80 million on revenue of $336.4 million for the fourth quarter, up from net income of $71.9 million on revenue $279 million. For 2013, its net income was $125.3 million, down from the $151.2 million in 2012, related primarily to $25 million in impairment charges for shutting down a noncore product line. But revenue grew more than 20 percent, from $1.06 billion to $1.26 billion. “We made significant progress on key research and development programs, which allowed us to introduce new products in early 2014 that will once again redefine the trajectory of sequencing,” said Jay Flatley, Illumina’s chief executive officer. “We plan to leverage this momentum in 2014 to more broadly enable the adoption of genomics.” Takeaway: Although esoteric molecular laboratories have had their own encounters with reimbursement issues, their ability to grow organically currently outstrips more traditional laboratories’ ability to grow.