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Genomic Health (GHDX - Analyst Report) reported second-quarter 2013 net loss of $3.0 million, down from net income of $1.8 million in the year-ago period. The company’s reported loss of 10 cents per share was narrower than the Zacks Consensus Estimate of a loss of 28 cents a share. Moreover, it was significantly down from the year-ago period’s earnings of 6 cents per share. The dismal performance was primarily attributable to a huge contraction in bottom line.

However, total revenue (comprising solely of product revenues in this quarter) climbed 10.5% year over year to $63.7 million, almost in line with the Zacks Consensus Estimate. The upside was driven by an 11% increase in product revenues and 9% growth in tests delivered.

Despite the completion of the collaboration with Pfizer Inc. (PFE - Analyst Report) in the sequentially last quarter, the company failed to generate contract revenues in the reported quarter.

The improvement in product sales was mainly on the back of a significant increase in invasive breast cancer penetration in the U.S. Continued international expansion was another major upside.. During the reported quarter, international product revenues grew 58% year over year to $9.2 million and international test volume increased 43%.  Genomic provided 20,640 Oncotype DX test results, up 9% year over year.

Gross profit increased 8.9% year over year to $52.9 million. However, the recent prostate cancer test launch and impact of sequestration led to a 125 basis points (bps) contraction in gross margin, which stood at to 83.1% in the quarter. On the other hand, with a 19.4% rise in operating expenses to $55.8 million, the company incurred operating loss of $2.9 million compared to operating profit of $1.8 million in the year-ago quarter. The rise in operating expenses was based on higher research and development (up 19.2% to $13.8 million), selling and marketing (up 18.4% to $28.1 million), and general and administrative (21.6% to $13.9 million) expenses.

Genomic Health exited the second quarter with cash and cash equivalents, and short-term marketable securities of $107.3 million, up from $99.1 million at the end of fiscal 2012.

Outlook

Genomic Health reaffirmed its guidance for fiscal 2013. The company still expects loss of 12 cents to EPS of 8 cents on revenues of $258–$266 million. Further, the company expects to deliver 82,000–84,000 Oncotype DX tests.

Recommendation

Genomic reported a disappointing quarter with respect to its earnings numbers, which was mainly the impact of sequestration and the Oncotype DX prostate cancer test launch in the last quarter leading to huge pressure on margin.

However, we are looking forward to the company’s successful business diversification with this much awaited test launch in May. We believe that this new test for prostate cancer will reduce the company’s dependence on the breast cancer tests over the long haul. Moreover, the recent Medicare reimbursement for DCIS Score is another plus.

Genomic Health currently retains a Zacks Rank #5 (Strong Sell). While we prefer to remain on the sidelines for Genomic Health, other medical device stocks worth a look are Thoratec Corp. (THOR - Analyst Report) and Align Technology Inc. (ALGN - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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