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Bear of the Day

I often like to re-visit previous Bear of the Day stocks after a few months if they are still Zacks #5 Rank Strong Sells, or have fallen back to that distasteful status. I first wrote about Genomic Health (GHDX - Analyst Report) in early October when the stock was around $30 and since then it has spent most of its time as a #4 Sell or a #5.

Needless to say, the stock hasn't done much in the past six months, hitting new 52-week lows in February below $26. Let me review some interesting history about the company and then we'll look at the earnings estimate revisions (EER) that keep the name in the cellar of the Zacks Rank.

Genomic Health is a life sciences company focused on the development and commercialization of genomic-based clinical diagnostic tests for cancer that allow physicians and patients to make individualized treatment decisions. It was started in 2000 by CEO Randy Scott, who was then at Incyte Genomics (INCY - Analyst Report).

Randy's experience with a close friend who was diagnosed with cancer brought him the realization that despite all the research to map and understand the human genome, there was little being done to help patients get the best care based on the molecular make-up of their specific tumor.

Scott set out with the goal of developing high-value diagnostics to enable more personalized cancer treatment decisions driven by the genomic activity within a patient's individual tumor.

In 2004, the company launched its first test, Oncotype DX, which has been shown to predict the likelihood of breast cancer recurrence and chemotherapy benefit in early stage breast cancer patients. The Oncotype DX assay represents the first diagnostic gene expression test on the market that provides consistent results across multiple independent trials having breast cancer patients, including a large validation study of The New England Journal of Medicine.

Earnings Outlook Cut in Half... Again

In October, I described how analysts had been steadily cutting earnings estimates. Here's a snapshot of how those cuts got harsher this year...

I also wrote then about the company's challenges to growth, citing that "Unless a positive fundamental catalyst surfaces, this stock could be on its way to test 52-week lows under $26. Investors should exercise caution and wait for a turn-around in the estimates before establishing new positions."

Genomic's science is definitely exciting in its ability to help patients and their physicians determine better treatments, and it was expected that the company would be launching a prostate cancer product this year (I have no update on that). But analysts are not very excited right now about the earnings front, especially given the company's dominant market share already in breast cancer diagnostics.

Here was the prescient view from Raymond James analysts last year when they downgraded GHDX to Underperform in September...

"While we model mid-single digit top-line growth in base U.S. breast cancer, the market is already 60% penetrated and Genomic Health has more than 90% market share, making outsized gains going forward unlikely. Additionally, Agendia continues to make a modest amount of noise with their MammaPrint test and the recent FDA-approval of NanoString’s Prosigna Breast Cancer Prognostic Gene Signature Assay also adds another market entrant in 2014, adding the potential for slight share erosion over time."

Clearly the outlook for Genomic Health has not improved. As always, use the Zacks Rank to tell you when the earnings picture is starting to turn around.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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