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Genomic Health's Cancer Test Business Strong, Expenses High

Zacks Equity Research

On Mar 20, we issued an updated research report on Redwood City, CA-based Genomic Health Inc. GHDX, a leading global cancer company with a focus on advanced molecular diagnostics.

The company continues to experience strong test volumes. It has made significant progress with its Oncotype DX breast cancer test. Per management, the company has also significantly increased its U.S. invasive breast cancer market penetration to 55%. Recently, management presented favorable data of Oncotype DX Breast Recurrence Score from multiple studies conducted globally. The studies have validated the assay to be a low risk and an affordable one for female patients.

Genomic Health is also upbeat about its other assay types. Notably, the company’s Oncotype DX Genomic Prostate Score currently has the opportunity to cater to 140,000 patients in the U.S. every year. We believe this indicates the huge potential for revenue growth that the company’s Prostate Cancer test currently holds in the U.S.

Additionally, the company’s colon cancer test helped it gain a global identity with more than 26,060 Oncotype DX test (in three major cancer types) results. Having established a strong foothold in the U.S., Genomic Health is now making considerable expansion in the international arena.

However, for the last three months, Genomic Health has been trading below the Zacks categorized Medical - Biomedical and Genetics industry. The company gained 1.2%, lower than the broader industry’s gain of 5.5%. We note that management’s newly-issued full-year revenue growth guidance projected a decline from the year-ago period.

Management has adopted several strategies to drive its top line, including portfolio expansion and increased penetration in the international market. This involves high cost of production and promotion which continues to weigh on Genomic Health’s gross margin.

Meanwhile, we are also concerned about Genomic Health’s high dependence on the breast cancer test for revenue growth. The company’s other tests for ailments such as colon cancer has failed to make any sizeable contribution to revenues. All these tests are currently in the early-to-middle stages of development and as such have attendant risks. As a result, any obstacles in the process will weigh heavily on the stock.

Zacks Rank & Key Picks

Genomic Health currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the medical product sector are Inogen, Inc. INGN, Bovie Medical Corporation BVX and ResMed, Inc. RMD. Inogen sports a Zacks Rank #1 (Strong Buy) while the other two companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen gained 82.1% in the last one year in comparison to the S&P 500’s gain of 15.1%. The company has a stellar four-quarter positive average earnings surprise of over 49.08%.

Bovie Medical surged 58.7% in the last one year in comparison to the S&P 500. It has a four-quarter positive average earnings surprise of 28.7%.

ResMed gained over 25.5% in the past one year, better than the S&P 500 mark. It also has a trailing positive average earnings surprise of 0.31%.

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Inogen, Inc (INGN): Free Stock Analysis Report
ResMed Inc. (RMD): Free Stock Analysis Report
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