Genomic Health Inc. GHDX reported second-quarter 2015 loss per share of 29 cents, a couple of cents wider than the Zacks Consensus Estimate of loss of 27 cents. The bottom line also deteriorated substantially from the year-ago loss by 93.3%.
Net loss for the quarter was $9.2 million, a decline of 100% from the net loss of $4.6 million incurred a year ago. Per management, this deterioration in net loss was primarily driven by Genomic’s investment in key areas for growth, all of which contributed to record number of tests delivered by the company in the second quarter.
Revenues in Detail
Total revenue in the quarter inched up 0.2% year over year to $70.6 million, but missed the Zacks Consensus Estimate of $71 million by a whisker.
During the second quarter, Genomic’s breast revenues improved 3%, on account of increased demand for the company’s Oncotype DX breast cancer tests; which contributed to the year-over-year top-line improvement.
However, international product revenues (representing 14% of product revenues) declined 16% year over year to $9.9 million. Access programs and reimbursement in Europe adversely affected international revenues in the second quarter, while unfavorable foreign currency reduced the same by 9%.
Nevertheless, international tests delivered in the reported quarter increased 13% from the prior-year level and represented approximately 21% of total test volume. This marked a record high in the number of international tests delivered and the highest quarter-over-quarter increase in two years.
During the second quarter, Genomic Health delivered more than 26,060 Oncotype DX test results, up 8% year over year.
Margin Trends
In the quarter under review, Genomic Health’s gross margin contracted 120 basis points (bps) year over year to 81.5%. Excluding the prostate test volume, where there is no reimbursement in place, the company's gross margin would have been over 84% in the quarter.
On the other hand, Genomic Health witnessed an 8.8% rise in operating expenses to $68.4 million owing to a solid 15.6% increase in research and development expenses of $14.6 million. Also, selling and marketing expenses were up 5.7% at $37.2 million, while general and administrative expenses spiked 10.4% to $16.6 million.
In the reported quarter, Genomic Health recorded operating loss of $10.8 million, reflecting a massive deterioration of 134.9% from the year-ago equivalent, owing to higher operating expenses.
Financial Update
Genomic Health exited the second quarter with cash and cash equivalents, and short-term marketable securities (excluding a corporate equity investment) of $86.8 million, compared to $91 million (excluding the available-for-sale investment in InVitae) at the end of the first quarter of 2015.
Guidance
Genomics has reduced its full year 2015 guidance, considering the current trend of a strengthening dollar. The company now expects its full year revenues in the range of $289–$302 million, down roughly $3 million from each end of the earlier guidance range of $292–$305 million. On the bottom-line front, the company now expects its loss per share for 2015 in the range of 59–81 cents, wider than the earlier provided range of 53–75 cents.
However, management continues to expect to deliver Oncotype DX tests worth $102,000 to $109,000, which represents a healthy growth rate of 7% to 14%.
Our Take
Genomic Health ended the second quarter of 2015 on a disappointing note, continuing its square miss over the Zacks Consensus Estimate, similar to the previous quarter’s outcome. The company’s reduced financial guidance for 2015 also worries us, which primarily reflects the company’s inability to cope with a strengthening U.S. dollar. Moreover, as Genomic is yet to receive reimbursement for its prostate cancer test, it continues to weigh on the company’s gross margin on account of higher cost of production.
However, during the second quarter, Genomic delivered a record number of prostate cancer tests, up 100% from the comparable period last year. We believe reimbursement for the prostate cancer test, which is expected in the upcoming fourth quarter, will help the company considerably reduce its production cost, thereby ushering in positive gross margin growth.
As management continues to hold faith in Western Europe’s ability to drive success overseas, we expect Genomic Health to return to positive international product revenue growth in the coming quarters, recovering from the negative growth observed in the said quarter.
Zacks Rank
Currently, the stock carries a Zacks Rank #4 (Sell). Better-ranked med-biomed/generic stocks include Actelion Ltd. ALIOF, AMAG Pharmaceuticals, Inc. AMAG and Gilead Sciences Inc. GILD. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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