Genomic Health Upped to Outperform

We recently upgraded Genomic Health (GHDX) to Outperform with a target price of $21.00.

During the third quarter of fiscal 2010, revenues climbed 17.2% year over year to $46.3 million, beating the Zacks Consensus Estimate of $45 million based on an 18% growth in product revenues to $45.8 million derived from the Oncotype DX breast cancer test. Apart from organic growth of the business, other factors contributing to the growth are increasing reimbursements and contribution from newer markets.

We are encouraged to note that during the quarter, revenues derived from international business continued to double annually, representing more than 10% of total test volume. Greater focus of the company on the international arena should further boost its top line in the forthcoming period.

During the quarter, Genomic Health delivered more than 14,730 Oncotype DX tests for use in treatment planning, up 16.9% compared to 12,600 tests delivered inthe year-ago period.

Apart from higher revenues, Genomic Health also benefited from better margin. Gross margin during the quarter improved by 200 basis points annually to 80.7% driven by lower license fees, reimbursement success and efficiency gains related to processing tests in the clinical laboratories. The company expects gross margin to remain above the 80% mark in the near future.

Moreover, Genomic Health recorded an operating income of $3.4 million compared to operating loss in the year-ago quarter based on higher revenues and controlled spending. The company recorded a decline in its R&D expense margin to 18% from 23% in the year-ago period, despite its various development programs. Genomic Health expects to end the year profitably compared to its earlier expectation of break-even or net loss of up to $3 million.

We are also encouraged by the NCCN guidelines, which could lead to growing awareness among patients and further increase the acceptance of the test. Meanwhile, the colon cancer test, launched in January 2010 is yet to make a significant contribution to the top line. However, the situation could improve gradually as Genomic Health is trying to receive reimbursement for this test, which should lead to increased adoption.

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