Genomic Health, Inc. on Path to Profitability

Genomic Health (GHDX) reported third quarter earnings on Tuesday. The company is still losing money, but the strong growth in tests and an increase in reimbursement put the test-maker on a path toward profitability.

Genomic Health results: The raw numbers

Source: Company press release.

What happened with Genomic Health this quarter?

• While revenue only grew 6% year over year, part of the slow growth had to do with the stronger dollar. Excluding currency changes, revenue would have been closer to 7.8%.
• The Oncotype DX breast cancer test remains the company's mainstay, but newcomer tests for DCIS and prostate cancer are the growth drivers with year-over-year growth of 65% and more than 70% respectively.
• Overall test growth of 17% outpaced revenue growth because not all of Genomic Health's tests are being fully reimbursed.
• The reimbursement issue will improve in the fourth quarter because Medicare started covering the Oncotype DX prostate cancer test on Oct. 13, beating Myriad Genetics (MYGN -3.06%) by two days. Myriad Genetics' Prolaris test gained reimbursement starting on Oct. 15. Myriad Genetics saw 16% quarter-over-quarter growth in its most recent quarter, which if annualized out would be in the ballpark of the 70% growth that Genomic Health reported. 
• While the loss per share was larger than the year-ago quarter, the loss includes a change in fair value of the company's investment in a marketable security. The operating loss for the quarter was only $5.4 million compared with $5.8 million for the third quarter of 2014.

What management had to say
Brad Cole, Genomic Health's COO and CFO highlighted the untapped market for DCIS and tests in Europe, "We believe the DCIS market, where penetration today is less than 10% and there is no other test available, is poised for continued growth to address a large unmet need for improved treatment decision-making." Later he added, "[The five largest markets of Western Europe] represented nearly one-half of international volume, demonstrating positive momentum from our investment to increase adoption in the major international direct markets, which are less than 10% penetrated and represent a revenue opportunity roughly equal to that of the US invasive breast cancer market."

So there are two markets that are both less than 10% penetrated that are growing at about 65% each. Sounds like a ripe opportunity.

Steve Shak, Genomic Health's Chief Scientific Officer made a brief comment on the company's development of tests using liquid biopsies, "We remain on track to launch our first product in 2016 and look forward to providing specifics around this product early next year." With the current offerings hitting their stride, investors should be focusing on the new products that will lead the next wave of growth.

Looking forward
Management guided that 2015 adjusted earnings will come in at the high end of its previous guidance of a loss in the range of $19 million to $26 million. Through the first three quarters of the year, Genomic Health is sitting on a loss of about $31 million, which includes a $5.5 million charge associated with the wind-down of a breast cancer collaboration that isn't included in the adjusted earnings guidance.

Subtract the $5.5 million from the $31 million and Genomic Health's current loss is right in the guidance range, implying that management thinks it'll be break even for the fourth quarter. A small profit would certainly be welcome, but investors should be focused on 2016 and beyond for profit growth.