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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