We have reiterated our Neutral recommendation on Genomic Health (GHDX) with a target price of $28.00.
Genomic Health reported an EPS of 10 cents in the most recent quarter, way above the Zacks Consensus Estimate of 4 cents, but lower than $0.12 in the year-ago period. Total revenue in the quarter climbed 12.5% year over year to $52.1 million, marginally missing the Zacks Consensus Estimate of $53 million.
The company derives the majority of its revenue from the Oncotype DX breast cancer test. Genomic has come a long way from a one-product, US focused company in 2007, when 24,450 tests were delivered with a 22% penetration. In 2010, the company has transformed itself to a two-product international company (with the launch of Oncotype DX colon cancer test) when 57,000 tests were delivered with 26% penetration rate.
In the most recent quarter, Genomic provided more than 16,890 Oncotype DX test results, as against 14,730 in the comparable period of 2010, representing a growth of 15%. The Oncotype DX colon cancer test is yet to make any significant contribution to the top line as the path to manage reimbursement has been a tad difficult.
Adoption of the colon cancer test is expected to improve with Medicare’s decision to cover the Oncotype DX colon cancer test. During the latest quarter, colon cancer tests delivered to Medicare patients represented nearly 1% of total test volume, which is expected to increase substantially. Moreover, the publication of the authoritative QUASAR study in the Journal of Clinical Oncology should lead to greater adoption of the test.
We are also encouraged by Genomic Health’s focus on the international market, which is considered to be an important driver of revenue growth in 2012. During the last quarter, revenues from the international market jumped 80% and now represent 10% of total product revenues. The third quarter also saw the company receiving a number of favorable breast cancer test reimbursement decisions taking the number of lives covered outside the US to more than 43 million, led by Canada, the UK, Israel, Greece, and Ireland. The stock retains a Zacks #2 Rank (Buy) in the short term.
Genomic Health is conducting multiple studies to expand its portfolio although many of these are in the early- to- middle stages of development and are several years away from commercialization. Besides, operating margin is under pressure due to higher expenses incurred to support international expansion and pipeline development programs.
Moreover, the competitive landscape is tough with the presence of players such as Laboratory Corporation of American Holdings (LH) and Quest Diagnostics (DGX) with strong distribution networks. Overall, we are Neutral on Genomic Health over the long term.
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
GENOMIC HEALTH (GHDX): Free Stock Analysis Report
LABORATORY CP (LH): Free Stock Analysis Report
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