Genomic Health's New Prostate Test May Extend The Stock's Upward Climb

| About: Genomic Health, (GHDX)

Genomic Health, Inc.'s (NASDAQ:GHDX) stock has risen over 31% in the last month. The molecular diagnostics company's upward swing may be due to an earlier announcement of an 8% increase in revenue, but what probably propelled the stock further in the last few days was that Genomic health announced its novel genetic test to gauge the aggressiveness of prostate cancer became available on the market Wednesday, May 15th. The test, named Oncotype DX prostate cancer test, may help tens of thousands of men who have to decide whether their cancer requires treatment immediately or if it can safely be monitored. The market rewarded the company today (Wednesday) by rising 2%

Oncotype DX analyzes multiple genes in a biopsy sample and gives a score for aggressiveness, similar to tests the company uses for its breast and colon cancer tests. What makes these tests so important is that doctors have seen such tests as a potential to curb a major problem in cancer care - overtreatment. Roughly, 240,000 men in the U.S. are diagnosed with prostate cancer, the second most common cancer in men. In 2008, it was estimated that, worldwide, there were over 900,000 men diagnosed with the disease, and the numbers are expected to double by 2030. Though an aggressive form kills as many as 30,000 men annually in the U.S., and roughly 258,000 worldwide, about half of the diagnoses are classified as low risk using current methods.

Most prostate tumors generally grow so slowly that they will not be life threatening, and treatment with surgery, radiation or hormone blockers isn't needed, but most men are afraid to skip treatment since some of the tumors can be far more aggressive and, not treated, could spread outside of the prostate. The problem was that there was no reliable test of how to tell which tumors would be more aggressive. That's where Oncotype DX comes in. According to a new UC San Francisco study, Oncotype DX was able to help predict whether a patient is more likely to harbor an aggressive form of the disease, tripling the number of men thought to be at low risk for aggressive prostate cancer. The test would allow patients at low risk a less invasive method of treatment, which includes monitoring the progression of the tumor or tumors.

This is not the first cancer screen test for Genomic Health. The company sells a similar product for breast cancer, which examines a patient's breast cancer tumor tissue at a molecular level, and gives information about the individual breast cancer diagnosis, helping the doctor tailor the best treatment options for the patient. Interestingly, doctors were a bit skeptical of the test at first until studies in larger groups of women showed the test had value. According to Dr. Len Lichtenfeld, deputy chief medical officer for American Cancer Society, the same may happen with the prostate test.

Genomic Health will now go head to head with the much larger company, Myriad Genetics Inc. (NASDAQ:MYGN) and its similar prostate cancer test, Prolaris, which hit the market last summer. Both tests analyze multiple genes in a biopsy sample and give a score for aggressiveness, and both tests did not require the Food and Drug Administration's approval due to separate rules that govern lab diagnostics. But Oncotype DX may have the advantage in that it may well be able to triple the number of patients who will be able to avoid invasive treatments.

Myriad Genetics is a $2.46 billion market cap company. The company has nine testing products currently on the market and ten in various phases in its pipeline, including its flagship product for assessing the risk of developing breast or ovarian cancer, BRACAnalysis, which accounted for 74% of the 3rd quarter revenue. Revenue for the fiscal 3rd quarter, which ended March 31, 2013, increased 21% over the same period in the prior year to $156.5 million. Third quarter earnings per diluted share were $0.46, an increase of 34% over the same period of the prior year. Net income for the 3rd quarter was $37.9 million, an increase of 28% over the $29.6 million same period of the prior year.

Myriad Genetics has raised its revenue expectations for fiscal year 2013. Total revenue is now expected to be between $595 million to $600 million, an increase over the previous guidance range of $575 million to $585 million, representing a 20% to 21% growth over the prior fiscal year. The company is also increasing its guidance for fiscal year 2013 diluted earnings per share to $1.65 to $1.67, up from $1.55 to $1.58 per share, representing a 27% to 28% growth over fiscal year 2012 diluted EPS.

Genomic Health has a market cap of 1.07 billion, and has a number of tests in its pipeline, but the company will have only three testing products on the market: breast, colon, and prostate. The company reported an 8% increase in revenue in the 1st quarter of 2013 to $63. That's $63.1 million compared to $58.5 million in the 1st quarter 2012. International product revenue represented 14% of the product revenue and grew by 69% to $8.5 million compared to the same period last year. Net loss in the 1st quarter of 2013 was $0.9 million, compared with net income of $0.8 million in the 1st quarter of 2012. Net loss for the quarter came in at $0.03 per share versus a profit of $0.03 per share in the year-ago period. Total operating expenses were $64.0 million, compared with total operating expenses of $57.6 million the previous year's quarter.

Genomic Health appears to have three solid testing products either on the market or days away from being on the market. However, given the stock's upward swing in the past month, I think it is due for a pull back. Genomic Health has a P/E ratio of 174. Myriad Genetics' P/E ratio currently sits at 20.95. Even if one takes into account that Myriad Genetics has almost 2.5 times the shares of the market as Genomic Health, one cannot overlook the high P/E when evaluating either company. Genomic Health is actively developing foreign markets, and as many U.S. companies have found over the past few years, there is great growth potential in these up and coming markets overseas. And given growth potential of the products, it might justify the high P/E ratio.


I like both companies, and if either of the companies can get the insurance carriers to pay for the prostate tests, I can see the stocks continue to rise. I think if Genomic Health's prostate test is successful on the market, the stock will continue to rise. But given the jump the stock has had over the past month, I'd wait to see if there is a pull back for a better entry price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.