Genomic Health (NASDAQ: GHDX ) didn't have the best of times in 2012. Shares rose only 6% for the year. Things were looking much better than that until November, when the company announced disappointing quarterly results. Will Genomic Health plod along or break out in 2013? Here are three key areas that investors should watch for this year.
1. New markets
The biggest chunk of Genomic Health's revenue currently comes from its Oncotype DX genetic test for invasive breast cancer. Although the company claims a 60% U.S. market penetration for the product, there is still room to grow sales even more.
Genomic Health is taking several approaches to boost these sales. The company mounted an Internet campaign targeting patients and their families, hoping to influence them to ask for genetic testing to identify risks. It also is focusing on interacting with physicians who don't tend to order the genetic tests for their patients. Watch to see if these efforts bear fruit in the coming months.
While the invasive breast cancer test will continue to be the primary breadwinner for the immediate future, several other opportunities for growth exist. Genomic Health rolled out Oncotype DX for patients with stage 2 colon cancer in January 2010 and followed up in June 2012 for patients with stage 3 colon cancer. It also launched a genetic test for ductal carcinoma in situ, or DCIS, an early form of breast cancer, in December 2011.
Look for the company's launch of its new prostate cancer test this year. Prostate cancer represents the largest market yet for Genomic Health. The company is building a dedicated sales force for the prostate cancer test. If its efforts are successful, this could be a game-changer.
Another key for Genomic Health in 2013 will be to increase international sales. International markets accounted for 11% of total revenue in the first nine months of 2012.
2. Where the money goes
There are three places to watch to see where the money goes in 2013. The first relates to third-party payers. Keep an eye on how quickly Genomic Health can line up positive coverage decisions from third-party payers. In the interim, the company will help patients obtain reimbursement on a case-by-case basis. If it can get momentum going with payers willing to set policies for approval of the newer tests, though, Genomic Health could really pump up its revenue.
The second place to watch is where insiders and big-money institutions park their money. Over the past six months, insiders have upped their holdings by 21%. The most recent quarter also saw net institutional buys of 1.5 million shares -- a little over 9% of the company's float.
On the flip side, look out for changes with Genomic Health's short interest. Short-sellers appeared to be covering some of their positions beginning in late October. However, there was a big jump in the stock's short interest during the last two weeks of 2012. Short interest as a percentage of float is now approaching 15%.
While you shouldn't buy or sell just because someone else is, there is wisdom in paying attention to what's going on. When insiders and big institutions buy, it's often a good sign. When the short interest spikes, it could be a danger sign. A high short interest could also mean that the stock will jump faster than otherwise on good news as short-sellers hurry to cover their positions.
3. The unexpected
If you're a fan of Nassim Taleb, author of The Black Swan and Antifragile, you know that the unexpected happens more often than many people think. The problem with the unexpected is that we don't know if or when it will happen.
There are at least a couple of scenarios that might be unexpected now but could impact Genomic Health. One relates to the Food and Drug Administration. On several occasions in the past, there have been rumblings from the FDA about regulating genetic tests like the ones offered by Genomic Health. Nothing has materialized so far, but the market likely wouldn't react positively if the FDA steps in.
The other situation that could develop is the emergence of significant competition for Genomic Health. The company has been able to grab a large market share in the invasive breast cancer market. However, there are several contenders who could step up to the plate.
GE Healthcare (NYSE: GE ) owns Clarient, which focuses on diagnostic testing of breast, lung, colon, melanoma and blood-based cancers. The company expanded its capabilities in 2012 with the purchase of SeqWright and could become a bigger threat for Genomic Health.
Myriad Genetics (NASDAQ: MYGN ) markets molecular diagnostic tests that assess the risk for developing breast and ovarian cancer and help determine the aggressiveness of prostate cancer. Myriad could present a challenge for Genomic Health as it launches its prostate cancer test. Other potential rivals include Illumina (NASDAQ: ILMN ) and Life Technologies (NASDAQ: LIFE ) , both of which have already announced plans to enter the clinical diagnostics market.
One real eye-opener about Genomic Health is its valuation. The stock trades at a nosebleed-level trailing price-to-earnings ratio of 102 and a forward multiple of 105. On the other hand, those levels are actually close to the low end of the range over the past five years.
The stock is still 23% below its highs from early October. I think it has room to run, but I'm allergic to triple-digit P/E multiples. Now could be a good time to buy for those less skittish than I am.
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