Genomic Health, Taking a Hit on Bottom Line, Bets Next-Gen Sequencing Will Yield Next-Gen Diagnostics

2/15/11Follow @xconomy

Genomic Health built itself into a profitable business in molecular diagnostics by using genetics analysis instruments that were state-of-the-art in the middle part of the last decade. But as the Redwood City, CA-based diagnostics company (NASDAQ: GHDX) looks further into the future, it has come to a clear conclusion.

Out with the old, and in with the new.

Genomic Health is looking for a way to rekindle its rapid growth of the past few years, and betting on new technology is a big part of the strategy. The company said last week it generated $178 million in sales in 2010, and achieved its first full-year profit since it was founded in 2000. But investors didn’t see much to cheer about here, because revenue grew only 19 percent over the prior year, and the company forecasts are that growth will level off at around 12 percent to 18 percent growth next year. Wall Street sent the stock down 5 percent the next day.

Certainly, Genomic Health has short-term things it can do to maximize its bread-and-butter Oncotype DX test by expanding into international markets, and by branching beyond breast cancer into colon and prostate tumor tests. But as those products run their course over time, Genomic Health wants to be in position to roll out new tests based on the breakneck pace of innovation of the past couple years in fast/cheap gene sequencing. So it’s investing in new diagnostic tests will look for patterns in a lot more genes than today’s molecular diagnostics can, and will make discovery of new tests cheaper, says founder and executive chairman Randy Scott. The spending is a drag on Genomic Health’s financial performance today, but the bet is it will pay big dividends further in the future.

“We are heavily invested in R&D programs, like next-gen sequencing, that are going to impact our bottom line for the next five years,” Scott says. “But we think it will help us build this eventually into a multi-billion dollar business over the course of the next 10 years.”

You need to dive a little bit into the history of technology at Genomic Health to understand what’s going on here. The company developed its first Oncotype DX test based on an instrument known as a real-time PCR machine, which uses the TaqMan chemistry sold by Life Technologies’ Applied Biosystems unit. The instrument, which amplifies DNA samples for analysis, was used to help discover the original 21-gene signature that Genomic Health’s Oncotype DX uses to predict the chance a woman with breast cancer will relapse, and whether she will benefit from a round of preventive chemotherapy. The RT-PCR platform was the best choice at the time, Scott says, because it had “really exquisite sensitivity, reproducibility, and precision.” The machine has been so good on those parameters, Genomic Health continues to use it for running the commercial tests it performs today.

But the more genes you want to analyze, the more expensive real-time PCR becomes. To recoup its sizable investment, Genomic Health to set a price of $4,000 for its one-time test, which has forced the company to run a lot of health economic analyses to justify the price. And as the company began to reach the limits of PCR technology, it started looking for a replacement platform, Scott says.

Given that several companies are now talking about sequencing entire genomes for $10,000 today, and potentially $1,000 or less in the not so distant future, it shouldn’t be a surprise that a company like Genomic Health is particularly interested. Over the past year, Genomic Health has been switching over its discovery research work to the new fast/cheap sequencing machines … Next Page »

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