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Genomic Health (GHDX - Analyst Report) reported third-quarter 2013 earnings per share (EPS) of 2 cents, significantly surpassing the Zacks Consensus Estimate of loss of 4 cents. However, the result lagged the year-ago quarter’s earnings of 11 cents per share. The company reported net income of $0.5 million, sliding 86.5% from net income of $3.7 million in the third quarter of 2012.

However, total revenue climbed 12.5% year over year to $65.9 million, marginally ahead of the Zacks Consensus Estimate of $65 million. The upside was driven by a 12.6% increase in product revenues, partially offset by a 6.9% decline in contract revenues to $0.26 million.

The improvement in product sales came mainly on the back of double-digit growth in test volume across all areas of the company’s business. The increased adoption of the prostate cancer test and the approval of Oncotype DX by National Institute for Health and Care Excellence’s (NICE) also aided the successful results. NICE recognized Oncotype DX as the sole test to predict recommended chemotherapy benefits for patients with early-stage, hormone receptor-positive, invasive breast cancer.

During the reported quarter, international product revenues grew 25% year over year to $10.1 million. Genomic provided 21,790 Oncotype DX test results, up 21% from the year-ago quarter.

Gross profit increased 11.3% year over year to $55.2 million. However, the recent prostate cancer test launch and impact of sequestration led to a contraction of 93 basis points (bps) in gross margin, which stood at 83.7% in the quarter. On the other hand, with a 19.3% rise in operating expenses to $54.7 million, the company incurred operating profit of a nominal $463 million, down a significant 87.5% from the prior-year quarter. The rise in operating expenses originated from higher research and development (up 20.0% to $14.7 million), selling and marketing (up 20.8% to $26.0 million), and general and administrative (up 15.7% to $14.0 million) expenses.

Genomic Health exited the third quarter with cash and cash equivalents, and short-term marketable securities of $114.0 million, up from $99.1 million at the end of fiscal 2012.

Recommendation

Genomic reported another quarter of healthy revenue growth. The number of Oncotype DX tests delivered by the company during the third quarter increased 9% year over year with deeper penetration in new markets. However, it came off as a sluggish quarter with respect to earnings numbers. The downfall was mainly owing to the impact of sequestration and the Oncotype DX prostate cancer test launch in the sequentially last quarter leading to pressure on margin.

Nevertheless, we are encouraged with the fact that NICE in the U.K. issued final guidance recommending Oncotype DX as the only multi-gene breast cancer test to guide chemotherapy treatment decisions. Moreover, Genomic health established node-positive and ductal carcinoma in situ (DCIS) coverage for approximately 1.3 million U.S. lives through a contract with a large Blue Cross Blue Shield state plan.

Genomic Health currently holds a Zacks Rank #4 (Sell). While we choose to advise against this stock at the moment, other medical device stocks that warrant a look are Actelion Ltd. (ALIOF), Osiris Therapeutics, Inc. (OSIR - Analyst Report) and AMAG Pharmaceuticals, Inc. (AMAG - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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