Reiterating Genomic at Neutral - Analyst Blog

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We reiterate our Neutral recommendation on Genomic Health ( GHDX ) following its fourth-quarter 2011 results though the performance missed the Zacks Consensus Estimates on both fronts - revenue and earnings.

While Genomic currently has two products in its portfolio, Oncotype DX breast and Oncotype DX colon cancer tests, the latter has yet to make any significant contribution to the top line. Banking on its several strategies directed toward an increasing acceptance of the Oncotype DX test, Genomicis well placed to make 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 with the progress made by the company on the reimbursement front. Consequently, we expect the growth momentum to continue for the time being.

Meanwhile, to improve adoption of the colon cancer test, Genomic Health is working with public and private payors and health plans to secure coverage for it is 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. In addition to the 45 million lives covered by Medicare, during the most recent quarter the company secured coverage for an additional 3.8 million lives through various arrangements. Genomic has made significant progress supporting wider adoption of the test. This includes the publication of QUASAR study in the JCO and launch of MMR testing for recurrence risk.

Given the huge market opportunity in DNA sequencing, we are encouraged by Genomic's decision to set up a wholly owned genetics subsidiary by March 2012. This decision will involve $20 million of investment over the next two years, the impact of which has been considered in the financial outlook for 2012. The company was attracted to this business having witnessed the drop in the cost of DNA sequencing and emergence of new medical applications with the potential to influence millions of people. Genomic expects this business to be a long-term contributor to the growth profile.

Although we are impressed with the various strategies adopted by the company so far, expenses are set to mount in the forthcoming quarters that will exert pressure on margin. For fiscal 2012, the company is projecting a net income level of $5−$8 million ($7.8 million in 2011) before investment in the new subsidiary.

The company is set to invest aggressively to support the recent launch of the Oncotype DX DCIS score, growing reimbursement for colon cancer test and the prostate cancer program. This will force the company to report net losses in the first two quarters. Moreover, the new genetics subsidiary is likely to result in full-year net loss of up to $8 million in 2012. The company also faces tough competition from players such as Myriad Genetics ( MYGN ), Cepheid ( CPHD ), among others.

Our recommendation is backed by Zacks #3 Rank ("Hold") in the short term.


 
CEPHEID INC ( CPHD ): Free Stock Analysis Report
 
GENOMIC HEALTH ( GHDX ): Free Stock Analysis Report
 
MYRIAD GENETICS ( MYGN ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CPHD , GHDX , MYGN

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