We reaffirm our long-term Neutral recommendation on Genomic Health (GHDX) following its third-quarter 2013 results. Despite an impressive growth trajectory, the financial results of this molecular diagnostic company continue to depend solely on the Oncotype DX breast cancer test – the most significant component of Genomic Health’s growth profile. The stock currently carries a Zacks Rank #2 (Buy).
Why the Reiteration?
Genomic Health reported another quarter of healthy revenue growth. Total revenue climbed 12.5% year over year to $65.9 million, marginally ahead of the Zacks Consensus Estimate of $65 million. However, net income of $0.5 million was down a substantial 86.5% year over year. Although earnings of 2 cents per share significantly exceeded the Zacks Consensus Estimate of a loss of 4 cents, the result lagged the year-ago quarter’s earnings of 11 cents per share.
Following the release of the third quarter results (Nov 5), most of the estimates have been revised upwards for both 2013 and 2014 in the last 60 days.
The number of Oncotype DX tests – the company’s flagship product, delivered by the company during the most recent quarter increased a significant 21% year over year with deeper penetration in new markets.
We encouragingly note that, in the quarter, the National Institute for Health and Care Excellence (NICE) in the U.K. issued final guidance recommending Oncotype DX as the only multi-gene breast cancer test suited to guide chemotherapy treatment decisions for patients with early-stage, hormone receptor-positive, invasive breast cancer. This marks a significant milestone in Genomic Health’s goal of reaching out to the global market.
However, Genomic Health is conducting several studies to expand its portfolio or increase acceptance of the tests, which in turn, is driving operating expenses and pressurizing margins. We are also concerned about the company’s dependence on the breast cancer test.
Moreover, Genomic Health’s multiple studies in the field of breast, colon, prostate, renal and other cancers are in the early-to-middle stages of development and as such have attendant risks. As a result, any hiccups in the process will weigh heavily on the stock.
Investors interested in the medical devices industry can also consider stocks such as Gilead Sciences Inc. (GILD), Heska Corporation (HSKA) and InSite Vision Incorporated (INSV). All these stocks sport a Zacks Rank #1 (Strong Buy).
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