Outlook for Medium-Size Labs Continues to Show Promise

The outlook for the mid-size and smaller publicly traded laboratories appears to be bright. Most reported gains in earnings or revenue, or significant capital infusions in the most recent quarter and continued to issue optimistic broadcasts regarding revenue and earnings growth moving forward.

OPKO Health
OPKO Health had the biggest bump up in revenue of all the reporting labs, although that was primarily due to its acquisition of Bio-Reference Laboratories, which closed on Aug. 21. For the third quarter ending Sept. 30, the company reported net income of $128.2 million on revenue of $143 million. That's starkly different from the third quarter of 2014, when it reported a loss of $48.7 million on revenue of $19.8 million.

In addition to the Bio-Reference deal, OPKO also entered into a biopharmaceutical development deal with Pfizer. "We believe that the Pfizer transaction ... and the acquisitions of EirGen and Bio-Reference Laboratories have had a positive impact on our financial operations and will provide significant revenue opportunities and an expanded commercial platform for us going forward," said Phillip Frost, OPKO's chief executive officer.

Adam Logal, OPKO's chief financial officer, told analysts that the Bio-Reference deal will also allow it to enjoy about $93 million in overall income tax benefit as it can use the deal to claim research and development credits to offset the company's historical losses.

For the first nine months of 2015, OPKO reported a net loss of $33 million on revenue of $215.5 million, compared to a net loss of $121.2 million on revenue of $65.6 million for the first nine months of 2014. The company obtained a $175 million credit facility not long after the Bio-Reference deal closed. That and the $212 million of cash on hand will allow it to better market existing tests and assist in the commercial launch of a new drug to treat hyperthyroidism.

The purchase of the much larger Bio-Reference by OPKO led to its stock being hit hard, and Wall Street apparently remains unconvinced of the synergies within the transaction. OPKO's stock, which was trading at nearly $19 a share in June, is currently below $11 per share. The company did not issue any guidance with its earnings report.

Myriad Genetics
After getting hit hard on losing the patent to its BRCA test in 2013, Myriad Genetics is on the comeback. The company reported a 9 percent gain in revenue for its first fiscal 2016 quarter ending Sept. 30, to $183.5 million from $168.8 million during the first quarter of fiscal 2015. Net income was up 66 percent, to $26.6 million from $16 million. The Salt Lake City-based lab had previously battled shrinking revenue after the U.S. Supreme Court invalidated its patent, allowing many other labs to introduce competing tests at lower prices.

Myriad's hereditary cancer testing business represented $157 million of its revenue, and growth was up 4 percent compared to a year ago. In a call with analysts, Myriad Chief Executive Officer Mark Capone said that the company was focused on increasing its market share for colon and endometrial cancer testing.

"In our view, Myriad's hereditary cancer business has proved to be more resilient than originally anticipated with the CDx assay helping offset other pressures," William Blair analyst Amanda Murphy said in a report.

The company stuck with its full fiscal year guidance of $750 to $770 million in revenue. That's up from the $723.1 million in revenue it reported for fiscal 2015, but still down from fiscal 2014's revenue of $778.2 million. Earnings are expected to rise about 10 to 15 percent.

Genomic Health
The Redwood City, Calif.-based Genomic Health reported modest growth for the third quarter, although its losses widened. It reported a loss of $11.8 million on revenue of $73.5 million, although $6.2 million was attributable to a tax expense regarding some of the company's security holdings. That compares to the third quarter of 2014, when it lost $6.2 million on revenue of $57.8 million. Revenue was up a total of 6 percent, while volume of the company's Oncotype DX prostate cancer assay was up 17 percent.

"In the third quarter, we delivered the highest level of test growth in two years and nearly double-digit revenue growth in the U.S.," said Genomic Health Chief Executive Officer Kim Popovits.

The company noted that it received Medicare approval for Oncotype DX in mid-October, and that is likely to drive significant revenue growth in subsequent quarters and move the company closer to profitability.

Foundation Health
The Cambridge, Mass.-based laboratory is still in late startup mode, and continues to post steep losses. However, revenue is growing quickly.

For the third quarter of calendar 2015, Foundation reported a loss of $20.6 million on revenue of $25.4 million. That compares to a loss of $13 million on revenue of $16.4 million for the third quarter of 2014. Much of the 54 percent of the yearover- year revenue growth was attributable to its testing for the biopharmaceutical realm, including an ongoing relationship with drug giant Roche. Overall test volume was up 25 percent during the quarter, although the company is still performing fewer than 3,000 tests per month.

For the first nine months of the year, Foundation lost $70.6 million on revenue of $67.2 million. That compares to a loss of $38.9 million on revenue of $42.4 million for the first nine months of 2014. Foundation is forecasting revenue for all of calendar 2015 to be between $85 million and $95 million. Its 2014 total revenue was $61.1 million and $29 million for 2013.

Veracyte
The South San Francisco, Calif.-based Veracyte also reported a big uptick in its quarterly sales. It reported a net loss of $8.9 million on revenue of $12.3 million for the third quarter ending Sept. 30. That compares to a net loss of $7.9 million on revenue of $9.8 million for the third quarter of 2014.

Volume of Veracyte's primary assay, the Afirma thyroid test, grew rapidly. It was up 46 percent compared to the year-ago quarter, buoyed in part by a recent recommendation by the American Thyroid Association that the Afirma can be used instead of surgery to rule out thyroid cancer in patients with indeterminately-sized nodules.

"We experienced robust growth in our Afirma business, driven in part by increased private payer coverage, new in-network contracts, and test performance that is unmatched in its ability to help patients avoid unnecessary surgery," said Veracyte Chief Executive Officer Bonnie Anderson in a statement.

For the first nine months of 2015, Veracyte reported a net loss of $25.7 million on revenue of $35.5 million. That compares to a net loss of $21.2 million on revenue of $26 million for the first nine months of 2014. The company stuck with its full year guidance of $48 million to $53 million in revenue and test volume of 19,000 to 21,000. For calendar 2014, it reported revenue of $38.2 million and performed slightly more than 14,000 tests.

Murphy noted in a recent report that given the cost savings associated with Afirma, "we continue to believe that the company has quite a bit of runway on the Afirma product."

Takeaway: The medium-sized and smaller molecular laboratories are continuing to report healthy rates of growth in revenue, if not profit.