Publicly-Traded Esoteric Laboratories Posted Big Revenue Gains for First Half of 2016

As personalized medicine continues to gain traction in the United States, the publicly-traded esoteric laboratories continue to chug along, with most reporting significantly higher revenue for the second quarter and first half of 2016.

Whereas volume growth of 1 to 2 percent a year among the large national labs has become normalized as a result of a shift of many patients to higher-deductible plans, "esoteric testing remains a source of strength across the lab space," William Blair & Co. analyst Amanda Murphy observed in a recent report.

Florida-based NeoGenomics was among the leaders of the pack in terms of growth, driven in part by its acquisition of cancer testing laboratory Clarient in late 2015. The deal helped drive test volume up 158 percent in the quarter compared to the second quarter of 2015.

The company reported consolidated revenue of $63.1 million, up 159 percent from the $24.4 million reported for the second quarter of 2015. The company also edged into the black, with net income of $413,000, compared to a loss of $176,000 for the year-ago quarter.

"Market share gains continue to drive excellent performance in the base NeoGenomics business, and Clarient test volumes have stabilized nicely," said NeoGenomics Chief Executive Officer Douglas VanOort. "Overall, we are pleased that our revenue growth has been so strong even as we are in the midst of significant integration activities."

For the first half of 2016, NeoGenomics reported net income of $568,000 on revenue of $122.8 million, compared to a loss of $937,000 on revenue of $47.4 million.

OPKO Health, another Florida-based laboratory, has also made progress assimilating its acquisition of BioReference Labs that was announced last year. The company reported net income of $15 million on revenue of $357.1 million for the quarter ending June 30. That compares to a loss of $43.3 million on revenue of $42.4 million for the second quarter of 2015. For the first half of the year, OPKO reported net income of $3.6 million on revenue of $648.1 million. It lost $161.3 million on revenue $72.5 million for the first half of 2015, before it had finalized the deal to acquire the much larger BioReference.

OPKO Chief Executive Officer Phillip Frost, M.D., told analysts that the company's 4KScore prostate cancer test had recently received a CPT code from the American Medical Association that will go into effect in early 2017. However, Frost suggested that the company has had an uphill battle obtaining Medicare coverage for the assay. Medicare administrative contractor Noridian initially provided a positive local coverage determination, but that was overruled by a negative ruling from Palmetto. "We have since submitted a rebuttal to Palmetto's draft determination and are submitting complete data packages to both MACs," Frost said.

Although Massachusetts-based Foundation Medicine has yet to report a profit, it also reported a solid quarter of growth. Although it reported a loss of $29 million for the quarter, revenue reached $28.2 million, up 26 percent. The loss also narrowed from the $33.1 million reported for the second quarter of 2015. The company distributes two versions of its FoundationOne cancer test.

For the first half of the year, Foundation reported a loss of $46.7 million on revenue of $58.6 million. That compares to a loss of $50 million on revenue of $41.8 million for the first half of 2015. Test volume increased 16 percent in the second quarter compared to the second quarter of 2015.

Foundation Chief Executive Officer Michael Pellini, M.D., said the company's genomic profiling assay was in parallel review by the U.S. Food and Drug Administration and the Centers for Medicare & Medicaid Services for use in oncology care. The intent is to get the assay approved for Medicare coverage to assist in oncology care.

"We believe that our recent accomplishments, which also include our participating in both the Expedited Access Pathway with FDA and Parallel Review with FDA and CMS for FoundationOne, position our company for continued growth and further competitive differentiation," Pellini said.

The company also announced a $100 million line of credit from Roche Finance (the drug giant Roche owns a stake in Foundation). The credit will be used for product development and for better management of working capital.

California-based Veracyte reported a second quarter increase in revenue of 23 percent, to $14.7 million, compared to $11.9 million for the second quarter of 2015. However, the company reported a widening loss of $11.2 million, up from $9.1 million from the year-ago quarter.

For the first half of 2016, Veracyte lost $21.3 million on revenue of $28.2 million, compared to a loss of $16.7 million on revenue of $23.1 million for the first half of 2015.

In a call with analysts, Veracyte CEO Bonnie Anderson said that the company planned to hire six more sales staff over the second half of 2016. She also indicated that the company had been in talks with officials from CMS regarding its proposed reduction in its reimbursement for the Afirma thyroid test from $3,200 to $2,240. The Medicare program comprises about 20 percent of Afirma's revenue. Anderson said she was "optimistic that the final Medicare reimbursement rate for the Afirma GEC will match the current rate of $3,200," although she did not provide specifics. Anderson said she also believes that CMS is on the brink of approving Medicare coverage for its Percepta lung cancer test.

The company reiterated its revenue guidance of $59 million to $63 million.

Another California-based laboratory, Genomic Health, reported a healthy growth in revenues and narrowed its losses. For the second quarter, it reported a loss of $6.1 million on revenue of $82 million. For the second quarter of 2015, it lost $10.8 million on revenue of $70.6 million.

The company reported increases in test volumes across the board: Oncotype DX breast cancer assays were up 12 percent; invasive breast cancer testing volumes were up 8 percent; and prostate cancer tests were up 13 percent. U.S. test volumes grew by 8 percent. Overseas test volumes grew 23 percent—including a 41 percent growth spurt in Western Europe—and now account for nearly a quarter of Genomic Health's total volume.

Genomic Health Chief Executive Officer Kim Popovits said that the company had recently launched the Oncotype SEQ liquid biopsy test for late stage solid tumor cancers, and entered into an agreement with Epic Sciences to commercialize its blood test for analyzing metastatic prostate cancer.

Popovits also told analysts that the company's market penetration for invasive breast cancer testing can grow from 50 percent to 80 percent.

As a result of the strong numbers, Genomic Health raised its 2016 revenue forecast slightly, from a range of $320 to $335 million to between $325 million and $335 million.

Despite the strong growth, some concerns for the future are present.

"The reported strength in esoteric testing remains juxtaposed with continued investor concern about next-generation sequencing testing's trajectory in the clinic due to increased payer scrutiny and lack of reimbursement structure," William Blair's Murphy noted.

Takeaway: The publicly-traded esoteric laboratories continue to post strong growth numbers, even as some have yet to operate in the black.