Zacks_Analysts' Blog : Genomic Health Beats on EPS - Analyst Blog

Genomic Health (GHDX) reported an EPS of 10 cents in the third quarter of fiscal 2011, way above the Zacks Consensus Estimate of 4 cents, but lower than 12 cents in the year-ago period.

Total revenue in the reported quarter climbed 12.5% year over year to $52.1 million, marginally missing the Zacks Consensus Estimate of $53 million. Product revenues (primarily from the Oncotype DX breast cancer test) climbed approximately 13% to $51.7 million in the quarter.

Contract revenues accounted for the balance. In the reported 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%.

Genomic Health recorded robust growth during the quarter driven by the US breast cancer business and significant growth in the international market. The company is also encouraged with Medicare’s decision to cover the Oncotype DX colon cancer test.

The company had launched the Oncotype DX colon cancer test earlier in 2010 but the test is yet to make any significant contribution to its top line. The company is in the process of securing reimbursements for the test from different countries.

Operating expenses during the quarter increased 15.8% year over year to $39.5 million driven by higher research and development (17.5% to $9.6 million), selling and marketing (16.3% to $20.2 million) and general and administrative (13.3% to $9.7 million) expenses.

Consequently, operating margin declined to 6.5% compared to 7.3% 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 revised its net income outlook for fiscal 2011 given its robust performance, success with respect to reimbursement and an amendment to a PCR licensing arrangement. The company now expects to report net income of $8 million compared to the previous guidance of $3−$5 million.

However, the revenue guidance of $200−$210 million with 63,000-66,000 tests remained unchanged. While Genomic Health continues to secure reimbursements for its colon cancer test, its breast cancer franchise 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. Meanwhile, the colon cancer test, launched in January 2010, is yet to make a significant contribution to the top line.

However, the situation could improve gradually as the company tries to get reimbursement for this test, which should lead to increased adoption. We are also encouraged by the company’s increasing focus on the international market. The stock retains a Zacks # 2 Rank (Buy) in the short term.

However, Genomic Health’s several studies to expand its portfolio are in their initial stages. Moreover, the presence of players such as Laboratory Corporation of America Holdings (LH) and Quest Diagnostics (DGX) makes the market very competitive. For the long term, we have a Neutral rating on Genomic Health.