Why Genomic Health Inc. Jumped Higher Today

By Brian Orelli Markets Fool.com

What happened

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Genomic Health (NASDAQ: GHDX) closed up 10.2% Tuesday following its announcement of solid fourth-quarter earnings after the bell Monday. The company's 2017 guidance certainly didn't hurt investors' confidence either.

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So what

Genomic Health delivered 8% more genetic tests in the fourth quarter than it did in Q4 2015. More importantly, product revenue rose even faster -- up 10% year over year -- as the company was able to get paid for more of its genetic cancer tests from insurers and government programs.

Test sales outside the U.S. were particularly strong, increasing 13% year over year. On a constant-currency basis, the increase would have been an even more impressive 16%.

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The rate of growth in the use of Genomic Health's prostate cancer test is accelerating, with U.S. volume up 29% in Q4 compared to a 16% growth rate for 2016 overall. Unfortunately, the prostate cancer test is still a small revenue contributor for the company since it's not fully covered by Medicare yet: It added just $3.6 million to the revenue line in the quarter.

The increased revenue with only a marginal increase in spending helped Genomic Health turn a profit in Q4. Sure, it was only $0.04 per share, but that's better than its $0.08 loss in the year-ago quarter.

Now what

Management is guiding for product revenue between $355 million and $370 million this year, a 9% to 13% increase from 2016. About 40% of the revenue growth is expected to come from increased sales of its prostate cancer test.

At the midpoint of that range, management thinks it'll be profitable, but didn't give a potential range for the earnings line. With so many fixed costs, Genomic Health has quite a bit of operating leverage, so small increases to revenue can result in larger increases to the income line.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Genomic Health. The Motley Fool has a disclosure policy.