Genomic Health Q2 Loss Narrower than Expected, Shares Up


California-based healthcare solutions provider Genomic Health Inc. (GHDX) reported second-quarter 2014 loss per share of 15 cents, narrower than the Zacks Consensus Estimate of a loss of 28 cents by 46.4%. However, the bottom line dropped a massive 50% compared to the year-ago loss of 10 cents per share. Despite an improvement in revenue, poor operational performance led to the wider year over year loss in the reported quarter.
Net loss for the quarter was $4.6 million against net loss of $3.0 million recorded in the year-ago period. Net loss narrowed sequentially in the quarter owing to stronger top line performance and lower research and development (R&D) expenses.
Following the earnings release, Genomic Health's share price increased 3.5% to eventually close at $26.15 on Friday.


Revenue in Detail
Total revenue rose a solid 10.7% year over year to $70.5 million, beating the Zacks Consensus Estimate of $69 million. The company derived its quarterly revenues solely from product sales. In the second quarter, Genomic Health's product revenues constituted the sale of the Onco Type DX breast cancer test and the new prostate cancer test.
The year-over-year improvement in product revenues was primarily driven by solid cash revenue and test growth. Also, 62% of tests delivered and 72% of product revenues were recorded on an accrual basis, which contributed to the increased product revenues in the quarter. In addition, the company experienced 13% growth in global adoption of Oncotype DX in invasive breast cancer.
During the reported quarter, international product revenues (representing 17.0% of product revenues) grew 29% year over year to $11.9 million. Genomic Health provided more than 24,050 Oncotype DX test results, up 16.5% from the year-ago quarter.
International test results jumped 32% during the second quarter and represented roughly 20% of the total test volume. International test volume and revenues delivered growth of approximately 30% on a year-over-year basis. In most overseas markets, the company's international penetration levels were below 10%. This reflected a significant opportunity for further growth, especially in Western Europe.
Margin Trends
In the quarter under review, Genomic Health posted gross margin of 82.7%, a contraction of 40 basis points.  However, 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 incurred a 12.6% rise in operating expenses to $62.9 million due to higher selling and marketing (up 22.3% to $34.6 million), and general and administrative (up 7.9% to $15.0
million) expenses. However, R&D expenses dropped 3.7% to $13.3 million.  Increase in operating expenses during the quarter was primarily a result of accelerated investments to support the expansion of both Genomic Health's prostate and international sales and its marketing efforts.
In the reported quarter, Genomic Health recorded an operating loss of $4.6 million as compared to the year-ago operating loss of $2.9 million.
Financial Update
Genomic Health exited the second quarter with cash and cash equivalents, and short-term marketable securities of $105.7 million, marginally up from $105.4 million at the end of 2013.
Business Highlights
In the second quarter of 2014, Genomic Health continued to penetrate the U.S. breast cancer market gaining market share of more than 90%. The company also achieved exceptional international growth and secured increased adoption of its new prostate cancer test which is expected to result in roughly 10% of total test volumes by the end of 2014. Additionally, in Canada, Genomic Health recently established Oncotype DX breast cancer test coverage for an additional 3.6 million lives in the province of Alberta, bringing the total lives covered to over 86% of the country's population.
To date, approximately 900 urologists have ordered the Oncotype DX prostate cancer test, up 30% compared to the year-ago period, and more than half of these physicians have now ordered tests for multiple patients. 
Genomic Health has not provided any fresh revenue or EPS outlook for full year 2014 in its second-quarter earnings report. However, earlier during its fourth quarter and fiscal 2013 earnings call, the company had predicted total revenue to vary in the range of $278 million to $286 million for 2014. The Zacks Consensus Estimate of $282 million for 2014 revenue remains within the predicted range.
The company had also anticipated a net loss in the range of 75 cents to 95 cents per share, on account of the increased investment in the U.S. prostate business. The current Zacks Consensus Estimate of loss of 89 cents also remains within the guided range.
Genomic Health had also projected delivery of 98,000 to 102,500 Oncotype DX tests for the full year ending Dec 31, 2014.
Per the recent released earnings report, the company anticipates third-quarter 2014 revenues to be similar to second quarter levels on account of the historic summer slowdown and cash revenues at normalized levels. Moreover, the company expects net loss in the third quarter to be greater sequentially due to increased R&D spending and consistent investments toward growth in the U.S. DCIS (Ductal Carcinoma in Situ), prostate cancer and international markets.
Our Take
Despite the anticipated loss, Genomic Health succeeded in beating the Zacks Consensus Estimate for sales and posting narrower-than-expected loss in this quarter.  Management anticipates the loss levels to gradually narrow down substantially in 2015 supported by the improved leverage from higher penetration in Genomic Health's U.S. invasive breast cancer market, consistent solid growth in international markets, a ramp in DCIS product following presentation of full results in San Antonio, and the beginning of reimbursement traction from the prostate franchise in the U.S., over time.
Although Genomic Health has observed healthy performance in test volumes that were adversely affected by harsh winter conditions in the previous quarter, it has not recovered fully from the lost volumes. Management believes it will be able to recover lost sales by the end of 2014, now that weather conditions are no longer adverse.
We believe Genomic Health's constant initiatives to capitalize on the $400 million opportunity in breast cancer in Europe and attempts to augment prostate cancer investment in the more-than-$400 million strong U.S. market should act as major revenue drivers for the company in the near term. 
Zacks Rank
Currently, Genomic Health carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Med-Biomed/Generic industry include Actelion Ltd. (ALIOF), Curis, Inc. (CRIS) and Cytokinetics, Incorporated (CYTK). All these stocks sport a Zacks Rank #1 (Strong Buy).
Read the Full Research Report on ALIOF
Read the Full Research Report on GHDX
Read the Full Research Report on CRIS
Read the Full Research Report on CYTK

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