Genomic Health (GHDX) reported an EPS of 8 cents in the second quarter of fiscal 2011, way above both the Zacks Consensus Estimate of 2 cents and EPS of 3 cents in the year-ago period driven by higher revenues.
Total revenue in the reported quarter climbed 17% year over year to $50.8 million, in line with the Zacks Consensus Estimate. Product revenues (primarily from the Oncotype DX breast cancer test) climbed approximately 19% to $50.5 million in the quarter. Contract revenues accounted for the balance.
In the reported quarter, Genomic provided more than 16,390 test results, as against more than 14,050 test results in the comparable period of 2010, representing a growth of 17%.
Genomic Health recorded robust growth during the quarter driven by the US breast cancer business and significant growth in the international market. The company believes that its international growth will strengthen further following the St. Gallen Panel’s recent decision to include Oncotype DX in its breast cancer guidelines.
The company had launched the Oncotype DX colon cancer test earlier in 2010 but the test is yet to make any significant contribution to the top line. The company is in the process of securing reimbursements for the test from different countries.
Results from a study conducted by the CALGB confirmed that the Oncotype DX colon cancer test predicts individualized recurrence risk for stage II colon cancer patients.
Operating expenses during the quarter increased 17.6% year over year to $40.3 million driven by higher research and development (23.8% to $9.9 million), selling and marketing (17.2% to $20.5 million) and general and administrative (12.6% to $9.9 million) expenses. Despite this, operating margin increased to 4.6% compared to 2.5% in the corresponding period of 2010. We believe the increases were primarily attributable to the growing international presence of the company and pipeline development.
Outlook
Genomic Health reiterated its outlook for fiscal 2011. The company expects to record $200−$210 million in revenues and net income of $3-$5 million. Moreover, around 63,000-66,000 tests results are expected to be delivered during the year. While Genomic Health continues to secure reimbursements for its colon cancer test, its breast cancer franchisee will be primarily responsible for top line growth.
Recommendation
Currently, Genomic Health is highly dependent on the success of the Oncotype DX breast cancer test. We are also encouraged by the company’s increasing focus on the international market.
Further, Genomic Health is conducting several studies to expand its portfolio or increase acceptance of the tests, though many of these are in their initial stages. Moreover, the presence of players such as Laboratory Corporation of America Holdings (LH) and Quest Diagnostics (DGX) induces competition in the market.
For the long term, we have a Neutral rating on Genomic Health.
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