Back to Main

Genomic Health Beats on EPS - Analyst Blog

By: Zacks.com
Posted: 8/9/2012 10:15:00 AM
Referenced Stocks: GHDX;ILMN;LIFE

Genomic Health ( GHDX ) reported net income of $1.8 million, lower than $2.3 million in the year-ago period. The company incurred net loss of $0.8 million related to its subsidiary, InVitae Corporation that was formed earlier this year to provide clinically relevant genetic information to physicians and patients. Genomic Health's reported EPS of 6 cents was way above the Zacks Consensus Estimate of loss of 2 cents, but was short of the year-ago quarter's 8 cents.

Total revenue in the reported quarter climbed 13% year over year to $57.6 million, nominally missing the Zacks Consensus Estimate of $58 million. Product revenues (primarily from the Oncotype DX breast cancer test) climbed the same magnitude to $57.2 million in the quarter while Contract revenues accounted for the balance. In the reported quarter, Genomic provided more than 19,020 Oncotype DX test results as against 16,390 in the comparable period of 2011, representing a growth of 16%.

Gross profit increased 14.1% year over year to $48.6 million coupled with a 50 basis point (bps) improvement in gross margin to 84.4%. Besides, a 16.2% rise in operating expenses to $46.8 million led to a 150 bps contraction in operating margin to 3.2%. Genomic Health reported operating income of $871 million during the reported quarter The rise in operating expenses was based on higher research and development (17.2% to $11.6 million), selling and marketing (15.8% to $23.8 million) and general and administrative (16.1% to $11.4 million) expenses.

Genomic Health's performance came on the back of strong growth of its tests including greater penetration in new markets - DCIS breast cancer, colon cancer and international. In the second half, the company plans to step up its operating expenses to fund its pipeline and other expansion plans, which is likely to keep margins under pressure.

Although the company derives the majority of its revenues from Oncotype DX breast cancer test, contribution from the colon cancer test should gradually improve with additional reimbursement decisions. Reimbursements for stage II colon cancer patients, covering an additional 6 million lives were established through several plans in Arkansas. We are also impressed with its success on the international front that includes the first hospital contract to provide colon cancer tests in Italy. The test is being provided to patients across 75 countries through various distribution agreements.

Outlook

Genomic Health reiterated its outlook for fiscal 2012. The company still expects to report revenues of $230−$240 million and tests of 75,000−77,000. Moreover, the net income guidance of $5-$8 million is before an incremental loss of up to $1 million for the new subsidiary.

Recommendation

We are encouraged with Genomic Health's second quarter performance that exceeded our estimates as well as the company's own guidance. The company's focus on its genetic subsidiary, InVitae Corporation, is also impressive and should yield positive results in the long term.

However, the expansion plans involve higher expenses, which in turn will adversely affect the margin. Besides, over the recent past, we have seen a lot of activity in the market targeting this specific niche of genetic sequencing. Life Technologies ( LIFE ) and Illumina ( ILMN ) are among the significant players in this business.


 
GENOMIC HEALTH (GHDX): Free Stock Analysis Report
 
ILLUMINA INC (ILMN): Free Stock Analysis Report
 
LIFE TECHNOLOGS (LIFE): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research