Genomic Health (GHDX) Q2 Loss Narrows Y/Y, Sales Beat

Genomic Health Inc. (NASDAQ:GHDX) reported second-quarter 2016 loss per share of 18 cents, reflecting an improvement of 37.9% from the year-ago quarter’s loss figure. The Zacks Consensus Estimate for the second quarter bottom line was also a loss of 18 cents.

Net loss in the reported quarter was $6.1 million compared with a net loss of $9.2 million in the year-ago quarter.

Per management, this net loss figure included a tax expense of $1.4 million that the company incurred on account of investment in a marketable security and a gain on sale of $0.6 million on the same marketable security.

Revenues in Detail

Total revenue in the quarter grew 16% year over year to $82 million and also beat the Zacks Consensus Estimate of $81 million. At constant exchange rate or CER, revenues improved 18%. Strong growth across both the U.S. and international markets drove the top line improvement.

Geographically, Genomic Health’s second-quarter revenues in the U.S. improved 15% to $69.6 million, while international revenues surged 24% (up 26% at constant exchange rate or CER) at $12.3 million. The U.S. revenue growth was fueled by U.S. invasive breast cancer revenue growth of 13% as well as Prostate test revenues which contributed 3% to top-line growth in the U.S. Moreover, revenues from the oncology franchise, which grew 13% in the U.S., also contributed to this growth.

On the other hand, international revenue growth came on back of the strong performance that Genomic Health delivered in the markets of Western Europe, particularly the U.K. and France. Besides, international tests delivered in the reported quarter increased 23% from the prior-year level and represented approximately 23% of the total test volume.

During the quarter, the company delivered more than 29,060 Oncotype DX test results, up 12% year over year.

Margin Trends

In the quarter under review, Genomic Health’s gross margin contracted 10 basis points (bps) year over year to 81.4% owing to 16.8% rise in cost of product revenues of $15.2 million.

On the other hand, Genomic Health witnessed a 5% rise in operating expenses to $71.9 million owing to an 11.8% rise in general and administrative expenses to $18.5 million, 5% increase in research and development expenses to $15.3 million and a 2% rise in selling and marketing expenses to $38 million.

In the reported quarter, Genomic Health recorded an operating loss of $5.1 million, exhibiting an improvement of 52.9% from the year-ago equivalent, owing to higher revenue growth compared to rise in cost of sales and operating expense.

Financial Update

Genomic Health exited the quarter with cash and cash equivalents, and short-term marketable securities (including a corporate equity investment) of $93.6 million, compared with $86.4 million at the end of the first-quarter 2016.

2016 Guidance

Genomic Health has narrowed its earlier provided revenue guidance for full-year 2016. The company currently expects to generate revenues in the band of $325–$335 in 2016 (reflecting annualized growth of 13%-17%), as against earlier guidance of $320–$335 million (representing annualized growth of 12%–17%). The current Zacks Consensus Estimate for revenues stands at $330 million, in line with the mid-point of the guidance.

On the bottom-line front, the company continues to anticipate 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 46 cents for 2016.

Moreover, company now expects to deliver Oncotype DX tests in the band of 118,500 and 121,000 (representing annualized growth of 10%–13%) in 2016, as against 117,500–121,000, (representing annualized growth of 10%–13%).

Our Take

Genomic Health ended second-quarter 2016 on a satisfactory note. While the company’s second-quarter bottom line outcome improved year over year and came in line with the Zacks Consensus Estimate, the top line managed to beat the mark. Moreover, Genomic Health continued to experience strong test volume as well as revenue growth, across its global region.

However, gross margin continued to be feeble as the company has been witnessing for past few quarters. Further, fluctuations in the price of the marketable security continued to hamper the stock, which going forward is expected to remain for the rest of 2016.

Nevertheless, we were encouraged to note that despite a huge rise in cost of sales, the gross margin decline was comparatively moderate, on account of a higher pace of revenue growth.

Zacks Rank & Key Picks

Genomic Health currently holds a Zacks Rank #3 (Hold). Some better-ranked medical stocks worth a look are Cepheid (NASDAQ:CPHD) , Masimo Corp. (NASDAQ:MASI) and Natus Medical Inc. (NASDAQ:BABY) . All these stocks sport a Zacks Rank #1 (Strong Buy).