S&P still a fan of GHI:
We forecast 2010 total revenues of $185 million,
representing 24% growth over 2009. In 2011, we
expect a 21% sales rise to $224 million.We see
GHDX building sales momentum, aided by an
expanded sales force, an increasing list of national
insurers (including Aetna, United Healthcare
and CIGNA) approving Oncotype DX reimbursement,
and industry validation from the late
2007 inclusion in ASCO and National Comprehensive
Cancer Network (NCCN) breast cancer
treatment guidelines.
We forecast 2010 gross margins of around 77%,
as higher test volumes yield lower per-test
costs.We see potential for slightly lower gross
margins in 2011 as the recently launched colon
cancer test yields reduced efficiencies. GHDX
has increased pipeline diagnostic investments
and has expanded test processing capacity,
enabling 49,000 test results to be delivered in
2009, 24% above 2008 levels.
Our 2010 EPS estimate is $0.07, and we forecast
EPS of $0.72 for 2011. With GHDX's $57.4 million
in cash and positive operational cash flows as
of the end of 2009, we believe it is on solid financial
footing.
Investment Rationale/Risk
We have a positive outlook for the Oncotype DX
breast cancer diagnostic test, as we see medical
treatment practices shifting toward personalized
medicine tools.We are encouraged by
U.S. reimbursement contract growth to cover
more than 90% of U.S. insured lives.We expect
a modest rollout of the newly launched colon
cancer recurrence prediction test, but expect
wider adoption as published study data furthers
physician awareness.We see a long-term opportunity
for Oncotype DX utility in such cancers
as prostate and renal cancers as well as
expanded colon cancer use.We expect
GHDX's global expansion to occur slowly due
to individual country regulatory requirements.
Risks to our recommendation and target price
include potential for FDA regulation over
GHDX's predictive tests, requiring clinical testing;
emergence of new competitors; and slower-
than-expected medical community adoption
of predictive genetic testing.
Our 12-month target price of $23 applies a 3.5X
multiple (a slight premium to diagnostic peers)
to our 2010 revenue estimate of $185 million,
based on the recent share count.