Bookkeeping: Starting Genoptix (GXDX) Position

Genoptix (GXDX) is a company I found this weekend in my search for "things that are working" and this $550M market cap company that came public last October, has a very straightforward business.

Genoptix is a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists. Our highly trained group of hemepaths utilize sophisticated diagnostic technologies to provide a differentiated, specialized, and integrated assessment of a patients condition, aiding physicians in making vital decisions concerning the treatment of malignancies of the blood and bone marrow and other forms of cancer.

This is yet another nice healthcare company from San Diego - we seem to have found a hotbed - from their website they have a nice presentation they've been using at some road shows and conferences. It's all fine and dandy but I like one set of numbers; financials. Those look quite nice as well. From the last earnings report

• Genoptix, Inc. (Nasdaq: GXDX - News), a specialized laboratory services provider, today reported revenues of $27.8 million for the second quarter of 2008 and $50.1 million for the first half of 2008, as compared to revenues of $13.9 million and $24.6 million for the respective periods in 2007. Stated revenue for the first half of 2008 included a $1.3 million benefit from changes in accounting estimates relating to prior periods.
• "Our strong performance in the first half of the year resulted in growth in all segments, as revenues increased by 99% over the second quarter of 2007 and 104% over the first half of last year," said Tina Nova Bennett, Ph.D., President and CEO of Genoptix. "Expanding our sales efforts and improving our ability to provide high quality diagnostic services to a wider audience continues to drive customer growth nationwide. Higher case volumes reflect the success of these initiatives, increasing 77% year-over-year to more than 9,300 cases since the beginning of April, our sixteenth consecutive quarter of solid growth in volumes and in revenues."
• The Company also reported GAAP net income of $5.6 million for the second quarter ended June 30, 2008 and $10.6 million for the first half of 2008 compared to GAAP net income of $3.8 million for the second quarter ended June 30, 2007 and $5.1 million for the first half of 2007. Diluted earnings per share, or EPS, for the second quarter of 2008 was $0.32 based on 17.5 million weighted average common shares outstanding, including the $0.14 impact from increased costs associated with non-cash stock-based compensation expense, resulting from the launch of our employee stock purchase program following our initial public offering, or IPO. Diluted EPS was $0.60 for the first half of the year, including $0.19 of non-cash stock-based compensation expense. The Company completed its IPO on November 2, 2007. On a pro forma basis, assuming conversion of all outstanding preferred stock, diluted EPS for the three and six months ended June 30, 2007 would have been $0.30 and $0.40, respectively
• Gross profit for the second quarter of 2008 improved 94% to $16.6 million from $8.6 million for the second quarter of 2007, or 59.7% of revenues as compared to 61.3% of revenues, respectively. Gross margins reflect the impact of additional costs associated with stock-based compensation and the investment in additional personnel to support our growing operations.
• "Our staff has expanded to include 44 sales representatives and 19 Cartesian hematopathologists on-site to service our more than 850 ordering physicians nationwide, as we continue to effectively pace our expansion relative to our growing customer base."

• Based on second quarter results and the recent confirmation of Medicare reimbursement rates, Genoptix is adjusting its performance outlook upward for the full-year 2008, and now expects revenues of between $105 and $108 million, up from the most recent guidance of between $90 and $95 million, which was provided following the first quarter of 2008.
• Net income expectations for the year are moving up from the previously provided range of between $15 and $17 million to approximately $20 million for the year, assuming an average annual tax rate of 5%. This includes the impact of an estimated $7 million in non-cash stock-based compensation for 2008, an increase resulting primarily from expenses associated with the initiation of the Company's equity incentive programs. Diluted GAAP EPS, which includes non-cash stock-based compensation of approximately $0.40 per share, is now expected to be between $1.11 and $1.16 on an estimated 17.6 million shares for the full year 2008.
• Based on continued infrastructure expansion and implementation of its strategic plan, the Company is now projecting capital expenditures of approximately $11.0 million for the full-year 2008, up from prior estimates of approximately $6.0 million due to the accelerated growth experienced during the first half of 2008 and higher than expected capitalized costs associated with related facilities expansion.

• Last month, Congress overrode a presidential veto that would have meant a 10.6% cut to Medicare reimbursement rates. Doctors and many elderly and disabled covered by the government insurance plan breathed sighs of relief. So did Genoptix (NasdaqGM:GXDX - News).
• The Carlsbad, Calif., lab company runs bone marrow and blood-based cancer tests for oncologists and hematologists. Medicare reimbursements make up about 40% of the company's business. So an almost 11% cut alone would have hurt. But since other insurers watch and often follow Medicare's reimbursement practices, the pain would have been amplified. (again this is the #1 risk to this stock in my opinion)
• Instead of cuts, the company is now looking at flat reimbursement rates for the rest of this year and a modest 1.1% increase in 2009. (so we should be safe until 2010 rates come up for review) "It was sort of a head wind until that was passed," said Bud Leedom, an analyst at Global Hunter.
• Now, revenue is growing fast as the company expands its sales force, branching into new regions of the country and selling more services to existing customers. Genoptix expects to break the $100 million mark in revenue for the first time this year. Last year, it posted $59 million in sales.
• Genoptix is still a young company. It incorporated in 1999 but didn't begin selling its specialized diagnostic services until 2004. It went public in October. The company focuses on diagnostics for community-based hematologists and oncologists -- hem/oncs, as the company collectively refers to them. Genoptix thinks there are about 8,700 hem/oncs in community settings -- that is, not within a hospital or medical center.
• It already has about 10% of those community hem/oncs as customers. And the company says the overall number of practicing hem/oncs is growing by about 3.8% a year, faster than the ranks of the general medical profession. (so with only 10% penetration there still is a lot of room for growth) "Based on the low market share to date and the aggressive ramp in sales, you could really see a lot of incremental revenue over the next five years or so," he (Leedom) said.
• Nationwide, bone marrow tests are about a $1-billion-a-year market, the company says. Those cases make up about 60% of Genoptix's volume. Under the current Medicare reimbursement rates, those cases generate an average of about $3,000 in revenue. Blood-based cases typically require fewer and less complicated tests, and generate between $100 and $3,000 per patient, the company says.
• Genoptix's focus on hematologists and oncologists is part of what distinguishes it from larger labs, which can run a wider range of tests.
• Analysts say that unlike competitors' results, Genoptix's test result reports also give the treating physician the history of previous tests, the progression of the cancer and possible treatment options. (kind of scary that this is a "unique" feature to Genoptix - you'd think this is standard)
• But the company doesn't have proprietary test technology. That leaves it having to win and maintain business through strong customer service, analysts say. Cowen & Co. analyst Kemp Dolliver doesn't see that as a problem. "The larger labs have designed their work flows for higher productivity, but have sacrificed the ability to provide a higher level of service as a result," he wrote in a client note.
• The company has a tight relationship with shipper FedEx (NYSE:FDX - News), which Dolliver says helps maintain its record of never having lost a sample. Nationwide, analysts say 1% to 2% of shipped samples are lost. Since many bone marrow tests in particular are uncomfortable or painful for patients, "the last thing you want to hear is we need to do another sample because we lost the first," Dolliver said.
• The company expects to finalize a location soon for a second laboratory, which could increase its capacity and provide necessary backup to its first lab. Dolliver thinks it will cost less than the company's $15 million estimate.
• The slowing economy has little direct impact, Nova Bennett told analysts in a second-quarter conference call. Most of Genoptix's community doctors seldom deal with Medicaid patients, who are poorer and possibly more likely to delay medical visits and tests during an economic slowdown, the CEO said. (while that is a sad statement on our society, it's a reality)