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Genomic Health Stays Neutral

Zacks Equity Research

We reiterate our Neutral recommendation on Genomic Health (GHDX) following its first-quarter 2011 results, with both revenue and earnings sailing past the corresponding Zacks Consensus Estimates.

While Genomic currently has two products in its portfolio, Oncotype DX breast and Oncotype DX colon cancer tests, the latter has yet to make any significant contribution to the top line. Banking on its several strategies directed toward an increasing acceptance of the Oncotype DX test, Genomic is well placed to make the most of the huge market potential. It has been observed that the Oncotype DX breast cancer test changed treatment decision in 37% of early-stage breast cancer patients thereby resulting in hundreds of millions of dollars in healthcare savings.

Genomic Health also diversified its offering with the launch of the Oncotype DX DCIS Score at the end of 2011. Besides, we are encouraged by the progress made by the company on the reimbursement front. Consequently, we expect the growth momentum to continue for the time being.

Meanwhile, to improve adoption of the colon cancer test, Genomic Health is working with public and private payors and health plans to secure coverage based on favorable clinical evidence. Adoption of the test is expected to improve with Medicare’s decision to cover the Oncotype DX colon cancer test. During the reported quarter, the company secured its first Veterans Affairs contract and coverage for an additional 3.9 million lives with two state Blue Cross Blue Shield plans.

Given the huge market opportunity in DNA sequencing, the company’s setting up of a wholly owned genetics subsidiary, InVitae Corporation, in March 2012, is considered to be a positive move. This decision involves $20 million of investment over the next two years, the impact of which has been considered in the financial outlook for 2012. We expect this business to be a long-term contributor to the growth profile. During the reported quarter, the company established a strategic alliance with OncoMed Pharmaceuticals for biomarker research to accelerate the clinical development of novel antibody cancer therapeutics.

However, Genomic Health forewarned that the heavy investments made in its varied developmental and pipeline programs would lead to the company incurring a loss in the second quarter. Escalating operating expenses would continue to put pressure on the company’s net income near term. In fact, the new genetics subsidiary is likely to result in full-year net loss of up to $8 million in 2012. To add to it, Genomic Health faces tough competition from players such as Myriad Genetics (MYGN) and Cepheid (CPHD), among others.

Our recommendation is backed by a Zacks #3 Rank (“Hold”) in the short term.

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