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Genomic Health (GHDX - Analyst Report) has presented positive data from the first decision making study of the Oncotype DX colon cancer test. The study demonstrated that Recurrence Score ("RS") result helps physicians in deciding the course of treatment for stage II colon cancer patients. It was observed that the RS score changed medical oncologists' treatment recommendations in 29% of the cases.

The Oncotype DX colon cancer test was launched in January 2010. Though the test aims to predict individual recurrence risk in stage II colon cancer patients after surgery, it has yet to make any significant contribution to the top line.

Genomic Health is focused on pursuing global adoption of and reimbursement for the test. In this regard the positive outcome of studies should help the company. Effective September 18, Palmetto GBA, the designated US contractor for Genomic’s Oncotype DX colon cancer test, established a formal coverage policy for all Medicare patients. This coverage decision allows Medicare patients with stage II colon cancer access to Oncotype DX.

Earlier, in November 2011, Genomic Health’s QUASAR clinical validation study was published by the Journal of Clinical Oncology (“JCO”). The QUASAR study, conducted with 1,436 patients, demonstrated that Genomic’s Oncotype DX colon cancer test predicts recurrence risk in stage II colon cancer patients following surgery. The study also establishes that the Oncotype DX colon cancer RS provides additional information beyond conventional markers such as T-stage, mismatch repair (“MMR”) status, nodes examined, grade and lymphovascular invasion.

To improve adoption of the colon cancer test, Genomic Health is working with public and private payors and health plans to secure coverage for the test based on favorable clinical evidence. Adoption of the test is expected to improve with Medicare’s decision to cover the Oncotype DX colon cancer test. This is also expected to have a positive impact on future revenue and the company’s ability to secure reimbursement from private and public payors moving forward. During the most recent quarter, colon cancer tests delivered to Medicare patients represented nearly 1% of total test volume, which is expected to increase substantially.

Recommendation

Genomic Health, over the recent past, has been conducting several studies to reduce dependence on its flagship product Oncotype DX breast cancer test. Favorable data from the colon cancer test should help the company in this direction. Meanwhile, having established a strong foothold in the US market, Genomic Health is targeting the international arena. However, securing reimbursement outside the US is a major deterrent to expanding the overseas business. The company expects revenue from the international market to be an important driver of top-line growth in 2012. Genomic Health currently retains a Zacks #2 Rank (short-term Buy rating).

Besides facing increasing competition from players such as Myriad Genetics (MYGN - Analyst Report) and Cepheid (CPHD - Analyst Report), operating expense is on an uptrend due to higher investments in international expansion, pipeline development and product launches. We have a long-term Neutral recommendation on the stock.

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