Genomic Health: A Strong Buy - Analyst Blog
Consistent uptrend in Oncotype sales, pipeline development, strategic investments and impressive second quarter performance have helped Genomic Health ( GHDX ), a global cancer company, to achieve a Zacks #1 Rank (Strong Buy) on October 09, 2012. Moreover, this company has delivered positive earnings surprises in four out of the last five quarters with an average beat in triple digits.
With a strong one-year return of 50.9%, a robust portfolio and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.
Strong Oncotype growth, focus on international expansion, several recent strategic initiatives, and attractive growth opportunities in the field of cancer diagnosis enabling physicians to make individualized treatment decisions are the primary rank drivers for this stock.
In August 2012, Genomic Health reported a strong second quarter 2012 result with earnings per share (EPS) of 6 cents, way above the Zacks Consensus Estimate of a loss of 2 cents. Although total revenues of $57.6 million nominally missed the Zacks Consensus Estimate of $58 million, it displayed a robust 13% year over year growth on the back of strong sales in Oncotype DX breast cancer test. Based on a solid quarter, the company increased its full year consolidated net income outlook to $4-$7 million, an improvement from the previous guidance of break-even or net loss of $3 million.
Genomic Health's flagship product, the 21-gene Oncotype DX breast cancer test has been recording strong growth over the past several quarters. The company also diversified its offering with the launch of the Oncotype DX DCIS Score at the end of 2011 and expects to deliver 75,000−77,000 tests in 2012.
Banking on its several strategies directed toward an increasing acceptance of the test, Genomic is well placed to capitalize on 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 resulting in hundreds of millions of dollars in healthcare savings. Besides, progress is also being made on the reimbursement front.
Genomic Health is progressing well with its pipeline expansion. Last month, the company announced positive results from a large clinical validation study of its biopsy-based prostate cancer test. Accordingly commercial launch of the Oncotype DX prostate cancer test is expected by the first half of 2013. In the same month, the company also announced positive data supporting the extended use of Oncotype DX tests in optimizing treatment decisions for breast and colon cancer patients at various stages of disease.
Genomic Health emphasizes on expansion of its international footprint where it has huge growth potentials. Securing reimbursement outside the U.S. continues to be the major driver of growth in the international business.
In another development, the company has formed a wholly owned genetics subsidiary, InVitae Corporation, to provide clinically relevant genetic information to physicians and patients from 2013. Viewing the huge market opportunity in DNA sequencing, this business could be a long-term contributor to the growth profile.
Earnings Estimate Revision
The Zacks Consensus Estimate for 2012 has grown 1700% over the past 90 days to 18 cents per share. Meanwhile, the Zacks Consensus Estimate for 2013 has risen 71.4% to 36 cents per share over the same time frame, representing year-over-year growth of about 98.17%.
Genomic Health's valuation looks stretched compared to its peers by most metrics. The company is trading at a price-to-book ratio of 7.61x, which is 5.6 times the peer group average of 1.35x. The premium is warranted given a higher long-term earnings growth rate (32.4%) compared with the industry average (12.5%).
Shares look fairly valued with a return on investment (ROI) of 7.6%, a marginal discount compared to the peer group average of 7.8%. This implies that the company reinvests its earnings almost as efficiently as its peer group. Also with respect to return on assets (ROA), assets of Genomic Health look profitable at 6.3% - another nominal discount compared to the peer group average of 6.6%.
About the Company
Headquartered in Redwood City, California, Genomic Health is a global cancer company with a focus on advanced molecular diagnostics. The company is focused on the development and commercialization of genomic-based clinical tests for cancer diagnosis that enables physicians to make individualized treatment decisions. With a market capitalization of roughly $1.04 billion, Genomic Health provides its Oncotype DX breast cancer tests in 86 countries and the colon cancer test to patients in 75 countries.
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