Genomic Health (GHDX): Q1 Loss Narrows Y/Y, Margins Weak

Genomic Health Inc. (NASDAQ:GHDX) reported first-quarter 2016 loss per share of 19 cents, reflecting an improvement of 36.7% from the year-ago quarter’s loss figure. The Zacks Consensus Estimate for the first-quarter bottom line was a loss of 21 cents.

Net loss in the reported quarter was $6.4 million compared with a net loss of $9.5 million in the year-ago quarter. Per management, the reduction in net loss was primarily driven by a realized gain and tax benefit of $2.4 million, on account of the company’s investment in a marketable security.

Revenues in Detail

Total revenue in the quarter grew 18.7% year over year to $80.9 million and also comfortably beat the Zacks Consensus Estimate of $78 million. Per management, Genomic’s Prostate test revenue growth significantly contributed to 3% of the company’s overall top-line growth in the first quarter. Moreover, oncology franchise, which grew 16%, also contributed to this growth.

Geographically, Genomic Health’s first-quarter revenues in the U.S. improved 22% to $70.5 million, while international revenues remained flat (up 2% at constant exchange rate or CER) at $10.4 million. The U.S. revenue growth was fueled by U.S. invasive breast cancer revenue growth of 17% as well as Prostate test revenues which contributed 4% to top-line growth in the U.S.

Moreover, international tests delivered in the reported quarter increased 33% from the prior-year level and represented approximately 52% of the total test volume. In the first quarter, Genomic Health’s global test growth was 16%.

During the quarter, the company delivered more than 29,510 Oncotype DX test results, up 16% year over year.

Margin Trends

In the quarter under review, Genomic Health’s gross margin contracted 80 basis points (bps) year over year to 80.5% owing to greater unit growth from U.S. prostate and international tests for which the company received partial reimbursement only. Also, cost associated with the implementation of new systems was responsible for the decline in the gross margin.

On the other hand, Genomic Health witnessed a 5.5% rise in operating expenses to $73.9 million owing to an18.3% increase in general and administrative expenses to $18.4 million and an 11.7% rise in selling and marketing expenses to $39.5 million. However, research and development expenses dropped 16.5% to $16 million.

In the reported quarter, Genomic Health recorded an operating loss of $8.8 million, reflecting an improvement of 40% 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 $86.4 million, compared with $94.9 million at the end of 2015.

2016 Guidance

Genomic Health had earlier provided its full-year 2016 revenue guidance. The company expects to generate revenues in the band of $320–$335 million in 2016, which represents annualized growth of 12%–17%. The current Zacks Consensus Estimate for revenues is pegged at $327 million, close to the mid-point of the guidance.

On the bottom-line front, the company expects to incur 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 is pegged at 47 cents for 2016.

The company also expects to deliver Oncotype DX tests in the band of 117,500–121,000, representing annualized growth of 10%–13% in 2016.

Our Take

Genomic Health started off 2016 on a satisfactory note. While the company’s first-quarter bottom line outcome has improved year over year, the top line managed to comfortably beat the Zacks Consensus Estimate. However, gross margin continued to be weak as the company failed to generate enough reimbursements to cover the costs associated with rising Prostate cancer test growth in the U.S.

Nevertheless, Genomic Health’s Prostate cancer test delivered a significant revenue growth in the quarter, while its legacy U.S. invasive breast cancer business as well as DCIS breast cancer and colon cancer businesses reflected strong growth. The company’s noticeable test volume progress in the developed markets of U.K., Japan and Germany also buoys optimism.

Zacks Rank & Key Picks

Currently, the company carries a Zacks Rank #4 (Sell). Better-ranked medical stocks are Baxter International Inc. (NYSE:BAX) , SurModics, Inc. (NASDAQ:SRDX) and Boston Scientific Corporation (NYSE:BSX) . While Baxter and SurModics sport a Zacks Rank #1 (Strong Buy), Boston Scientific carries a Zacks Rank #2 (Buy).