Genomic Health: Possible Takeover Candidate?

| About: Genomic Health, (GHDX)
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Genomic Health (NASDAQ:GHDX) is a pure-play oncology in-vitro diagnostics company with approved products and a pipeline to drive future growth. It fits in well with the growing importance of personalized medicine in the pharmaceutical industry. Personalized medicine is comprised of two parts- the drug, and the diagnostic, a combination sometimes referred to as Dx/Rx. Biomarker and companion diagnostic development have been most notable in the oncology field. The high clinical trial failure rate coupled with the advent of targeted therapies have certainly been drivers in this trend.

According to a report by PriceWaterhouseCoopers (PWC), the diagnostics market is only 2% the size of the overall drug market. With encouragements from the FDA and current industry trends toward personalized medicine, this market is set for growth.

PWC also noted the high levels of M&A activity in this already highly consolidated industry in recent years. Acquisitions have rearranged the rankings of the top diagnostics makers since 2004. Interestingly, Siemens, which was not even a top ten player in 2004, jumped to number two by 2008. With GE now getting into the game, the industry can only become more consolidated. Smaller and midsized players will have trouble getting attention from big Pharma and Biotech collaborators unless they bulk up to expand their product offerings and expertise.

Genomic Health has two diagnostic assays on the market: Oncotype DX Breast Cancer and recently approved Oncotype DX Colon Cancer. The Oncotype DX Breast Cancer assay is a RT-PCR assay that tests for the expression of 21 genes selected to predict chemotherapy outcomes and chances of recurrence in certain breast cancer patients, helping physicians with the decision of prescribing therapies. Oncotype DX colon Cancer assay is based on the same technology as Oncotype DX Breast Cancer, but tests for 12 genes to predict the likelihood that a Stage II colon cancer will return after surgical removal. Tests for NSCLC, melanoma, and prostate cancer are in the pipeline.

A companion diagnostic is in the works with Pfizer for its blockbuster, Sutent, in Renal Cell Carcinoma, also with the Oncotype DX technology.

Revenues have increased about 35% from $111 Million to $150 Million between 2008 and 2009. Losses narrowed from $18 Million to $9 Million. Growth is however dependent on the Breast Cancer test and its expanded usage. Although the Colon Cancer test has been approved since this January, the company does not expect to see significant revenue generation from it for several years due to difficult negotiations with payers for reimbursements.

The stock price for GHDX has dropped from its 52 week high of $22 to its current $13.88 and valued at less than $400 Million.

Genomic Health would make an ideal addition for a company that wants to selectively add to its in-vitro diagnostics portfolio. In return, Genomic Health would gain the expertise to succeed in getting reimbursements for its new products.

Disclosure: No position