Waiting for Profitability at Genomic Health, Inc.

By Markets Fool.com

As management warned us in February, this year is going to be a tale of two halves for Genomic Health . We're just starting the bad half. The profit line isn't going to get better for a few more quarters.

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On the bright side, Genomic Health is selling more tests, which is a good sign for the anticipated profit in the fourth quarter. The volume of tests performed in the first quarter increased 10% year over year, thanks to the nearly tripling of the number of prostate cancer tests run by Geneomic Health and a 50% increase in tests for ductal carcinomain situ, or DCIS, an early non-invasive tumor found in the milk ducts of women's breasts.

Product revenue, on the other hand, wasn't nearly as robust, up just 2% year over year. The stronger dollar affected revenue on the 20% of tests that are performed internationally, but at constant currency, revenue would have only been 1 percentage point higher. The main culprit in the difference between test growth and revenue growth comes from the reduction in price the company can get for its prostate cancer test that isn't being reimbursed yet.

With spending having increased faster than revenue -- partially because of a one-time R&D charge associated with a breast cancer collaboration that ended -- Genomic Health's first-quarter loss increased 27.5% compared with the year-ago quarter. Of course, the loss was only$9.5 million, so it's not as if Genomic Health has that far to go to get to profitability.

The key to producing a profit in the fourth quarter will come from reimbursement of its prostate cancer test. Genomic Health has secured the first purchase agreements with U.S. government facilities for the prostate cancer treatment, but the real boon is private insurers and Medicare, where management said it's still working on gaining reimbursement.

International reimbursement could also help grow sales and profit. In England, the NHS allowed public hospitals to start covering Genomic Health's breast cancer test on April 1. And in Germany, regulators announced that they'll reimburse genomic tests for selected breast cancer patients in specific treatment settings. It's a positive step forward, although additional steps still need to be completed to get reimbursement for Genomic Health's test specifically.

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Beyond profitability
Investors can be forgiven for focusing on the fourth quarter, when the company should turn profitable, but there's life after that point.

Obviously, sales of the prostate cancer test should accelerate with reimbursement in place -- and it's a double addition to the profit line, since margins will increase as well. There's certainly plenty of growth to be had, since the prostate cancer market is larger than the invasive breast cancer market.

Looking into 2016, Genomic Health is planning on launching its first liquid biopsy test to follow patients with a blood test as their cancer develops. We'll get a first look at the company's liquid biopsy data at the American Urological Association meeting later this month. And data from a proof-of-concept study for its liquid biopsy bladder cancer test will be presented at the American Association for Cancer Research Precision Medicine meeting in the middle of June.

And as the company stops burning cash, an acquisition with the $91 million on its books could be a good way to leverage its sales force and increase profits further.

The article Waiting for Profitability at Genomic Health, Inc. originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Genomic Health and owns shares of the company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.