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Genomic Health Back to Neutral

GHDX

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Genomic Health (GHDX - Analyst Report) reported mixed second quarter 2012 results with earnings per share of 6 cents that were well above the Zacks Consensus Estimates for a loss of 2 cents, but revenues of $57.6 million that missed.

While we are impressed with Genomic Health’s progress with respect to its Oncotype franchise, additional investments are being made to fund its newly formed subsidiary, InVitae Corporation. The company recorded a net loss of $800,000 related to InVitae during the quarter, which is adversely affecting its bottom line.

In addition, margin continues to remain under pressure as operating expenses have been increasing over the past few quarters and are likely to increase in the second half of 2012. This will primarily be due to Genomic Health’s investment in the core cancer business with new recruitments, initiation of new studies and groundwork preparation for the prospective launch of a prostate cancer test. As a result, we prefer to go back to our Neutral recommendation as upside potential of the stock seems limited.  

While the company currently has two products in its portfolio, Oncotype DX breast and Oncotype DX colon cancer tests, the second one is yet to make any significant contribution to the top line. Penetration of the colon cancer test could improve gradually with Genomic Health’s efforts on securing reimbursement and the rise in patient base with the inclusion of stage III patients being treated with oxaliplatin-containing adjuvant therapy.

The company has come a long way from being a one-product U.S. focused company in 2007, when 24,450 tests were delivered (with a 22% penetration), to the present when more than 66,000 Oncotype DX test results (with 16% growth) were delivered in 2011. Genomic Health also diversified its offering with the launch of the Oncotype DX DCIS Score at the end of 2011.

The company recorded 16% year-over-year growth in test volume to 19,020 tests during the reported quarter on the back of deeper penetration in new markets – DCIS, colon cancer and international. It has been observed that the Oncotype DX breast cancer test changed treatment decision in 37% of the early-stage breast cancer patients resulting in hundreds of millions of dollars in healthcare savings. Besides, we are encouraged with the progress made by the company on the reimbursement front.

Having established a strong foothold in the U.S. market, Genomic Health is targeting the international arena and is entering into several agreements to meet this objective. The company’s Oncotype DX breast and colon cancer tests are available to patients in 86 and 75 countries, respectively through these collaborations. Securing reimbursement outside the U.S. continues to be the major driver of growth in the international business.

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