Genomic Downgraded to Neutral

Recently, we downgraded Genomic Health (GHDX), an oncology-based biotech company, to Neutral with a target price of $24.00.

Genomic Health presented encouraging results for its flagship product Oncotype DX. Oncotype DX, launched in January 2004, is used for early stage breast cancer patients to predict the likelihood of cancer recurrence, the likelihood of patient survival within 10 years of diagnosis and the likelihood of chemotherapy benefit. Studies presented indicate increasing importance of the Oncotype DX Recurrence Score (RS). A meta-analysis of seven studies conducted with 912 patients observed a large impact of RS on treatment decisions of breast cancer patients. It was observed that doctors using this test changed their treatment decision in more than one-third of the patients thereby reducing the use of chemotherapy in 28% of the cases with the help of RS analysis.

Similarly, some patients who were considered to be at low-risk were identified as having high-risk disease. This shows that RS provides key information for treatment decision-making that cannot be determined by traditional measures. We believe these favorable studies should lead to greater acceptance of the Oncotype DX test thereby further improving the company’s top line.

Genomic Health is targeting the international market as well and established a European subsidiary in February 2009. The company has also established exclusive distribution agreements for its Oncotype DX breast cancer test with distributors of 13 countries as of September 30, 2010. Moreover, the company has secured reimbursement coverage from many public and private payors in the UK, Canada, Germany, Israel and Greece, which would be covering more than 27 million lives.

We also note that Genomic Health has initiated multiple international clinical studies to support the acceptance of the breast cancer test outside of the US. We are encouraged to note that during the quarter, revenues derived from the 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.

We also appreciate the National Comprehensive Cancer Network (NCCN) guidelines, which could lead to growing awareness among patients and further increase the acceptance of the test. Since our Outperform recommendation, a month back, the stock price has gone up by almost 30% and is currently at its 52-week high. Consequently, we believe, the upside potential of the stock is limited. Hence we are moving back to a Neutral recommendation.

GENOMIC HEALTH (GHDX): Free Stock Analysis Report

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