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JP Morgan Downgrades Genomic Health to Underweight

NEW YORK (GenomeWeb) – JP Morgan has downgraded Genomic Health to Underweight from Neutral, citing a slower than expected coverage expansion for the company's prostate cancer test, and a "tepid" outlook for the company's core breast cancer testing business.

The investment bank also lowered the price target on Genomic Health's stock price to $25 from $28.

In a research note, JP Morgan analyst Tycho Peterson wrote that while the investment bank is encouraged by Genomic Health's progress in some areas, "competitive pressure remains strong, broader private reimbursement remains a hurdle, and tepid growth in the core US invasive breast market reflects increasing challenge of outgrowing a maturing market."

"Although the company intends to supplement growth with international expansion and a new product pipeline, we believe these efforts will take time to evolve and will inevitably limit near-term leverage," Peterson added.

He also noted struggles related to a blockage in government funding in France this year and about $3M in lost revenue due to US hurricanes in the third quarter that led Genomic Health to lower its full-year 2017 revenue expectations from a range between $355 million and $370 million to a new range of between $345 million and $355 million.

Also in the short term, the company has taken longer than intended to gain Medicare reimbursement for its prostate cancer test in intermediate risk patients, Peterson said, and the downgrade reflects a longer view of the market.

"Although most of these impacts are transient, and management expects a number of reimbursement-related tailwinds in 2018, we view it challenging for [Genomic Health] to outgrow a maturing market for its core US invasive breast business, which overshadows the small, albeit faster growing prostate business. As we rebalance our ratings, we see better risk/reward in other names we cover," he said.

Genomic Health's testing is still dominated by breast cancer, but the company saw only sluggish growth in that market last quarter, and market penetration doesn't seem to be increasing, Peterson added. And though the company's test for early breast cancers, or ductal carcinoma in situ is gaining penetration, "revenue contribution is limited given the small scale."

On the upside, Genomic Health believes that positive results from an analysis of intermediate risk patients in the TAILORx trial, which it expects to present later this year, can accelerate growth. And the company also anticipates increases in reimbursement rates for its tests in 2018.

In international markets volume is growing at higher rates for the company's breast cancer tests, and a new collaboration with Biocartis to develop an IVD version of the Oncotype DX breast cancer test will allow the company to offer kits that can be performed at partner labs and hospitals, Peterson wrote.

Meanwhile, in prostate cancer, despite a delay in achieving coverage for intermediate cases, Genomic Health has said it is optimistic about future growth in a market that is only about 20 percent penetrated so far.

The firm's pipeline is also focused on this area, with progress made on a test collaboration with Epic Sciences — an AR-V7 CTC assay for advanced patients. According to Peterson, Genomic Health has already submitted a dossier for Medicare coverage of that test, expecting a positive coverage decision in early 2018. The company also recently announced a new collaboration with Cleveland Diagnostics to develop a high-PSA reflex test using Cleveland's IsoPSA technology.

However, Peterson wrote that the impact of many of these factors beyond next year remains unclear and is not enough to offset the factors leading to its downgrade of the company.

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