Genomic Health (GHDX) Posts Wider-than-Expected Q3 Loss

Genomic Health Inc. (NASDAQ:GHDX) reported third-quarter 2016 loss per share of 8 cents, reflecting an improvement from the year-ago quarter’s loss figure of 36 cents. However, the loss figure was wider than the Zacks Consensus Estimate of a loss of 7 cents.

Net loss in the reported quarter was $2.8 million compared with a net loss of $11.8 million in the year-ago quarter.

Revenues in Detail

Total revenue in the quarter improved 11.8% year over year to $82.2 million, missing the Zacks Consensus Estimate of $83 million by a whisker. At constant exchange rate or CER, revenues improved 18%. Strong growth across both the U.S. and international markets drove the top line.

GENOMIC HEALTH Price, Consensus and EPS Surprise

GENOMIC HEALTH Price, Consensus and EPS Surprise | GENOMIC HEALTH Quote

Geographically, Genomic Health’s third-quarter revenues in the U.S. improved 11.1% to $70 million, while international revenues surged 15% (up 18% at constant exchange rate or CER) to $12.1 million. The U.S. revenue growth was fueled by invasive breast cancer revenue growth of 9% as well as 3% contribution from Prostate test revenues. Moreover, revenues from the oncology franchise, which grew 9% in the U.S., also contributed to growth.

On the other hand, international revenue growth came on back of strong performance in the markets of Western Europe, particularly U.K. and France. Also, international tests increased 15% from the prior-year levels and represented approximately 24% of the total test volume.

During the quarter, the company delivered more than 29,990 Oncotype DX test results, up 8% year over year.

Margin Trends

In the quarter under review, Genomic Health’s gross margin expanded 277 basis points (bps) year over year to 84.1%. Apart from significant top-line growth, the improvement in gross margin was fueled by the 4.7% fall in cost of product revenues of $13.0 million.

On the other hand, Genomic Health witnessed a 10.6% rise in operating expenses to $72.2 million owing to an 11.2% rise in general and administrative expenses to $18.2 million, 12% increase in research and development expenses to $15.1 million and a 9.8% rise in selling and marketing expenses to $38.8 million.

In the reported quarter, Genomic Health recorded an operating loss of $3.0 million, exhibiting an improvement of 44.4% from the year-ago equivalent, owing to higher revenue growth.

Financial Update

Genomic Health exited the quarter with cash and cash equivalents, and short-term marketable securities (including a corporate equity investment) of $98.6 million, a slight improvement from $93.6 million at the end of second-quarter 2016.

Guidance

The company expects revenues in the fourth quarter of 2016 to be approximately $84 million, depicting double-digit growth. This also implies approximately 14% revenue growth for the year, consistent with the midpoint of the company’s full-year revenue guidance of $325–$335. Management also expects to achieve full-year operating leverage of approximately 40% in 2016 or 40 cents of improved operating income for every new revenue dollar when compared to 2015, leading to net loss for the year that’s consistent with the midpoint of its full-year guidance. On the bottom-line front, the company’s full-year guidance is a net loss of $12–$18 million at the mid-point of revenue guidance (excluding the effect of the company's investment in a marketable security), or net loss per share of 37–55 cents. The current Zacks Consensus Estimate of loss stands at 47 cents for 2016.

Genomic Health has not provided any outlook for fiscal 2017 yet.

Our Take

Genomic Health ended third-quarter 2016 on a disappointing note with both the top and the bottom line missing the Zacks Consensus Estimate. We are concerned about the company’s rising operating expenses as well.

Nevertheless, we are encouraged that there has been a slight decline in cost of sales combined with gross margin expansion, on account of higher pace of revenue growth.

Management encouragingly noted that Genomic Health has delivered three consecutive quarters of double-digit revenue growth. This we believe may be driven by the company’s performance in the U.S. invasive breast cancer and prostate test segments. Specifically, in invasive breast cancer, the Oncotype DX test proved to be the company’s only test to predict all major short- and long-term outcomes.

Zacks Rank & Key Picks

Genomic Health currently carries a Zacks Rank #4 (Sell). Better-ranked medical stocks are GW Pharmaceuticals plc (NASDAQ:GWPH) , Baxter International Inc. (NYSE:BAX) and Bovie Medical Corporation (NYSE:BVX) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 67.5% year to date compared to the S&P 500’s 3.3% over the same period. The company’s four-quarter average earnings surprise is 41.6%.

Baxter international rallied 22.91% year to date, above the S&P 500’s 3.3%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded 20.1% gain in the past one year, above the S&P 500’s 2.4%. The company has a trailing four-quarter average earnings surprise of 6.3%.

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