Genomic Health Beats Estimates - Analyst Blog

The third quarter of fiscal 2010 was the second consecutive profitable quarter for Genomic Health (GHDX). The company reported an EPS of 12 cents compared to the prior-year period's loss per share of 2 cents driven by higher revenues. According to the Zacks Consensus Estimate, the company was expected to break even.

Total revenues in the reported quarter climbed 17.2% year over year to $46.3 million, beating the Zacks Consensus Estimate of $45 million. Product revenues from the Oncotype DX breast cancer test climbed approximately 18% to $45.8 million in the quarter. Contract revenues accounted for the balance.

In the quarter, Genomic delivered in excess of 14,730 test results, as against more than 12,600 test results in the comparable period of 2009, representing a growth of 17%. Recent data presented by the company is directed towards an increasing acceptance of the test.

In October, Genomic Health provided positive results from a study conducted with Oncotype DX test at the European Society for Medical Oncology (ESMO) Congress in Milan, Italy. It was observed that the Oncotype DX recurrence score (RS) had a meaningful impact on physicians in deciding treatment options for early-stage breast cancer patients in Spain. In 31.8% of the cases, physicians changed their treatment methods with the knowledge of the RS score. Similar results had been observed in the US.

Genomic Health had launched the Oncotype DX colon cancer test earlier this year although the test is yet to make any significant contribution to the top line. However, we note that the company secured reimbursement from a public insurer in Greece, covering more than 20% of the population for stage II colon cancer.

While research and development spending during the quarter slipped 10.3% annually to $8.2 million, both selling & marketing and general & administrative expenses climbed 13.2% to $17.3 million and 17% to $8.6 million, respectively. The increases were primarily attributable to the growing international presence of the company.

Recommendation

Currently, Genomic is highly dependent on the success of Oncotype DX breast cancer test. Although the company has launched an Oncotype DX colon cancer test, it will take some time to be able to contribute significantly to the top line. However, the situation could improve gradually as the company is trying to receive reimbursement for this test, which should lead to increased adoption.

For the long term, we have a Neutral rating on Genomic Health. The stock retains a Zacks #3 Rank (Hold) for the short term.