Q1 Loss Wider than Expected at Genomic Health - Analyst Blog

Genomic Health Inc. GHDX reported first-quarter 2014 loss per share of 24 cents, wider than the Zacks Consensus Estimate of loss of 18 cents. Moreover, results significantly dropped seven-fold compared to the year-ago loss of 3 cents per share.

Net loss for the quarter was $7.4 million against net loss of $0.9 million recorded in the year-ago period.

Following this disappointing earnings performance, Genomic Health's share price declined 1.5% on May 8.

Revenue in Detail

Total revenues rose 6.2% year over year to $67 million, but missed the Zacks Consensus Estimate of $69 million by a whisker. During the quarter, the company derived its revenues solely from product sales. In the first quarter, Genomic Health derived substantially all of its product revenues from the sale of the Onco Type DX breast cancer test.

The 6.2% improvement in product revenues partly resulted from increased adoption as evidenced by a 13% year-over-year increase in test volume. Also, a 7.4% increase in revenues recorded on an accrual basis, amounting to $49.3 million, contributed to the raised product revenues in the quarter.

During the reported quarter, international product revenues (representing 17.2% of product revenues) grew 35% year over year to $11.5 million. Genomic Health provided more than 23,080 Oncotype DX test results, up 13.4% from the year-ago quarter.

International test results surged 43% during the first quarter and represented 20% of the total test volume. However, total test volume was slightly lower than expected because of the extended harsh weather conditions across the eastern half of the U.S., which impacted revenues by approximately $1 million.

Margin Trends

In the quarter under review, Genomic Health posted gross margin of 82%, a contraction of 200 basis points.

On the other hand, Genomic Health incurred a 16% rise in operating expenses to $74.2 million, due to higher research and development (up 7.3% to $14.7 million), selling and marketing (up 19.3% to $32.7 million), and general and administrative (up 12.2% to $14.7 million) expenses. Increase in operating expenses during the quarter was primarily a result of accelerated investments to support the expansion of both Genomic Health's prostate and international sales and its marketing efforts.

In the reported quarter, Genomic Health recorded an operating loss of $7.2 million as compared to the year-ago operating loss of $0.9 million.

Financial Update

Genomic Health exited the first quarter with cash and cash equivalents, and short-term marketable securities of $100.9 million, down from $105.4 million at the end of 2013.

Business Highlights

In the first quarter of 2014, Genomic Health expanded its penetration into the U.S. breast cancer market and gained market share of over 90%; achieved exceptional international growth, and increased adoption of its recently launched prostate cancer test which represents a promising new market opportunity for the company. Additionally, Genomic Health continues to see higher adoption in the U.S. within the breast cancer market, as reflected by a 4% year-over-year increase in test group, representing 74% of the company's total test volume.

Till date, Genomic Health has provided the Oncotype DX test to patients in more than 70 countries and has secured reimbursement coverage for approximately $115 million patients, outside the U.S.

Guidance

Genomic Health reiterated its revenue and EPS outlook for full year 2014. Earlier during its fourth quarter and fiscal 2013 earnings call, the company had declared its expectation of total revenue to vary in the range of $278 million to $286 million. The Zacks Consensus Estimate of $282 million remains within the predicted range.

However, the company anticipated a net loss in the range of 75 cents to 95 cents per share, on account of the increased investment in the U.S. prostate business. The current Zacks Consensus Estimate of loss of 87 cents also remains within the guided range.

Genomic Health also plans to deliver 98,000 to 102,500 Oncotype DX tests for the full year ending Dec 31, 2014.

Our Take

Despite the loss anticipated for 2014, management hopes to lead the genomics diagnostics industry on the back of increased investment to expand its U.S prostate business, successful core business and multiple commercial opportunities with the Oncotype DX tests.

Although harsh weather affected revenues marginally during the quarter, management's financial expectations were met in March and April. Management believes it will catch up soon on its lost sales, now that weather conditions are no longer adverse.

We believe Genomic Health's constant initiatives to capitalize on the $400 million opportunity in breast cancer in Europe and attempts to augment prostate cancer investment in the more-than-$400 million strong U.S. market should act as major revenue drivers for the company in the near term. On the reimbursement front, Genomic Health has been making constant progress.

Zacks Rank

Currently, Genomic Health carries a Zacks Rank #3 (Hold). However, some of the well-placed stocks that are worth a look in the biomedical and gene industry include ANI Pharmaceuticals, Inc. ANIP, Affymetrix Inc. AFFX and Myriad Genetics MYGN. While ANI Pharmaceuticals and Myriad Genetics sport a Zacks Rank #1 (Strong Buy), Affymetrix carries a Zacks Rank #2 (Buy).