Genomic Health to Outperform

We recently upgraded Genomic Health (GHDX - Analyst Report) to ‘Outperform’ from ‘Neutral’ on the basis of robust growth in its Oncotype DX franchise, a trend that is expected to continue given the various strategic initiatives undertaken by the company.

These strategies aim at increasing acceptance of its flagship product, Oncotype DX test. Genomic we believe is well placed to make the most of the huge market potential. It has been observed that the Oncotype DX breast cancer test changed treatment decision in 37% of early-stage breast cancer patients, thereby resulting in hundreds of millions of dollars in healthcare savings.

Genomic Health also diversified its offering with the launch of the Oncotype DX DCIS Score at the end of 2011. Besides, we are encouraged by the progress made by the company on the reimbursement front. Adoption of the test is expected to improve with Medicare’s decision to cover the Oncotype DX colon cancer test. Accordingly, we expect the growth momentum to remain on a steady keel.

We are also encouraged by the company’s decision of setting up a wholly owned genetics subsidiary, InVitae Corporation, in March 2012. This decision involves $20 million of investment over the next two years, the impact of which has been considered in the financial outlook for 2012. We expect this business to be a long-term contributor to the growth profile given the huge market opportunity in DNA sequencing.

During the most recent quarter, the company established a strategic alliance with OncoMed Pharmaceuticals for biomarker research to accelerate the clinical development of novel antibody cancer therapeutics. Although setting up of the genetic subsidiary will involve substantial investment (that could result in a net loss in the second quarter), we expect the company to benefit from its focus on sequencing. Despite the tough competitive landscape with the presence of players such as Myriad Genetics (MYGN - Analyst Report) and Cepheid (CPHD - Analyst Report), we expect Genomic Health to grow over the long term.

Our recommendation is backed by a Zacks #1 Rank (Strong Buy) in the short term.