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Here's Why Genetic Testing Stocks Rose as Much as 31.8% in January

Maxx Chatsko, The Motley Fool

What happened

Investors waited for years, hoping that genetic-testing companies would live up to their awesome potential to improve medicine and usher in the first wave of personalized healthcare. That patience finally began paying off in 2018 as multiple companies, including Genomic Health (NASDAQ: GHDX) and NeoGenomics (NASDAQ: NEO), turned profitable, while others held highly anticipated initial public offerings.

The newly profitable industry has created even higher expectations for 2019 -- and the main players started off the year on the right foot. Shares of NeoGenomics paced the peer group with a 31.8% gain in January, according to data provided by S&P Global Market Intelligence. That was followed by Invitae (NYSE: NVTA) and Genomic Health, which gained 27.3% and 17.7%, respectively. Each of the three genetic-testing stocks has gained at least 118% in the last year.

A hand drawing an ascending bar chart on a chalk board.

Image source: Getty Images.

So what

Invitae is the only company of the trio that is still delivering operating losses. However, it reached an important inflection point in the third quarter of 2018 -- the first time year-over-year operating losses declined. If it holds up, then the trend could put the business on pace to achieve operating profits sometime in 2020, which wouldn't be too surprising given its overall growth trajectory.

The business is also alone among peers in having issued preliminary full-year 2018 results and initial full-year 2019 guidance. Invitae said it likely generated about $144 million in revenue last year and processed 302,000 tests. It expects to hit $220 million in revenue and process 500,000 tests in 2019 while making steady progress improving operating cash flow and operating losses.

Progress toward those lofty marks figures to make Invitae the next genetic-testing business to reach a sustainable level of profitability. Both NeoGenomics and Genomic Health reached that milestone in 2018.

NEO Chart

NEO data by YCharts.

NeoGenomics had flirted with quarterly operating profits here and there in the past but its focus on lower gross-margin cancer diagnostics made profits more elusive than investors would have liked. That appears to have changed last year after the company hit higher revenue totals and reduced operating expenses per test. It posted operating income of $7.2 million on revenue of $200 million through the first nine months of 2018 as a result.

That still puts NeoGenomics just behind Genomic Health in terms of revenue growth and operating efficiency. Genomic Health recorded its first-ever quarterly operating profit in the second quarter of 2018 -- and it shows no sign of slipping back into the red. The company is even delivering comfortable levels of net income, which puts it in rarefied air among its peers.

In fact, Genomic Health raised its full-year 2018 guidance at the last minute after reporting third-quarter results. It bumped up expectations for full-year 2018 net income from a paltry $2.5 million to $27 million. Double-digit revenue growth and better-than-expected operating efficiency drove the positive surprise.

A buccal swab on a print out of a genetic test.

Image source: Getty Images.

Now what

Both Invitae and NeoGenomics will report full-year 2018 operating results on Feb. 19. Genomic Health has yet to schedule its full-year 2018 earnings conference call, but investors can expect it to occur soon. The important story line in 2019 is that each company is growing at a double-digit clip and improving its profitability.

Considering that the genetic-testing industry remains highly fragmented, investors might expect the profitable growth of NeoGenomics and Genomic Health to enable acquisitions of smaller peers in 2019. The increased financial flexibility coupled with a fast-growing U.S. market certainly create some intriguing opportunities for individual investors.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Genomic Health. The Motley Fool has a disclosure policy.