GHDX Reports Loss, Beats on Revs

Genomic Health (GHDX) reported first-quarter 2013 net loss of $0.9 million, down from a net income of $0.8 million in the year-ago period. The company’s reported loss of 3 cents per share was significantly down from the year-ago period’s earnings of 2 cents per share as well as the Zacks Consensus Estimate of break-even earnings. A huge contraction in the bottom line drove this dismal performance.

However, total revenue in the reported quarter climbed 7.9% year over year to $63.1 million, beating the Zacks Consensus Estimate of $62 million. Product revenues climbed $4.8 million to $57.9 million in the quarter, while Contract revenues accounted for the balance.

The improvement in product sales was mainly on the back of significant international growth (up 69% year over year to $8.5%) with diversification of business and successful utilization of an important global opportunity. In the reported quarter, Genomic provided 20,350 Oncotype DX test results, up 9% year over year. This would have been 11% without considering one additional day in the year-ago quarter due to a leap year.

Gross profit increased 8.6% year over year to $53.3 million. However, there was a 50.4 basis points (bps) improvement in gross margin to 84.6%. On the other hand, with a 12.4% rise in operating expenses to $48.8 million, the company incurred operating loss of $889 million compared to operating profit of $871 million in the year-ago quarter. The rise in operating expenses was based on higher research and development (up 14.5% to $13.7 million), selling and marketing (up 12.6% to $27.4 million), and general and administrative (9.7% to $13.1 million) expenses.

Genomic Health exited the first quarter with cash and cash equivalents and short-term marketable securities of 96.1 million, down from $99.1 million at the end of fiscal 2012.

Outlook

While reporting the fourth quarter and fiscal 2012 results, Genomic Health had provided its guidance for fiscal 2013. The company still expects net earnings/loss per share in the range of a loss of 12 cents to EPS of 8 cents on revenues of $258–$266 million. Further, the company expects to deliver 82,000–84,000 Oncotype DX tests.

Recommendation

Genomic reported a dismal quarter with respect to its earnings numbers, which was mainly due to a huge operating loss during the quarter. To add to our worries, this scenario will barely change in the second quarter as the company expects operating expenses to increase further with its preparation for the execution of prostate cancer test. Genomic Healthcurrently expects a net loss of $3 million in the second quarter.

While we are concerned about the company’s dependence on the breast cancer tests, we look forward to the recent launch of the Oncotype DX prostate cancer test following the presentation by the University of California, San Francisco (:UCSF) of a positive clinical validation study at the 2013 American Urological Association (:AUA) Annual Meeting in San Diego.

Genomic Health currently retains a Zacks Rank #3 (Hold).While we prefer to remain on the sidelines for Genomic Health, other medical device stocks worth a look are Conceptus, Inc. (CPTS), Myriad Genetics (MYGN) and HEALTHSOUTH Corp. (HLS). All these stocks carry a Zacks Rank #1 (Strong Buy).

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