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Goldman Sachs Initiates Coverage of Genomic Health with Neutral Rating

NEW YORK (GenomeWeb News) – Goldman Sachs today initiated coverage of Genomic Health with a Neutral rating and a six-month price target on its stock of $36.

In a research note, analyst Isaac Ro noted the growth potential of the Redwood City, Calif.-based firm's new products, but said that costs associated with those products will offset growth. Additionally, the company faces increased competition as well as a murky regulatory environment.

Genomic Health's flagship product is its Oncotype DX breast cancer test, which Ro estimates has a 90 percent share of the breast cancer recurrence test market and greater than 50 percent market penetration. Further growth in the breast cancer market, he added, will result primarily from an expansion outside the US.

The firm has announced plans to increase its footprint internationally and now has a direct commercial presence in the UK, Germany, and Canada. It also has agreements with more than 20 distributors across more than 80 countries.

Ro estimates that Genomic Health will see 14 percent revenue growth on a compounded annual growth rate from the Oncotype Dx breast cancer test outside the US between 2012 and 2015, excluding ductal carcinoma in situ revenues. The company made the Oncotype DX test available for DCIS patients in December, and Ro expects the test to be "an incremental market expander," with $23.1 million in revenues by 2015.

Genomic Health has targeted Europe primarily for international growth, Ro said, but healthcare there is mainly controlled by government "and we believe the hurdles to achieve reimbursement will be more difficult in the current austerity-driven environment."

The company has diversified its product offerings with new launches as well as tests in the development pipeline. However, Ro noted that gaining market traction with those products will not come cheap. In early 2010 Genomic Health launched its Oncotype Dx colon cancer test, and so far, it has obtained limited reimbursement coverage for the test.

As part of the company's efforts to increase adoption and reimbursement for the test, it has conducted several studies to demonstrate its utility. Four major studies have been published so far, but "[w]hile data from these studies is compelling, additional studies are necessary," Ro said and noted that for the Oncotype DX test for breast cancer, Genomic Health completed 14 clinical studies.

The company also has said that it plans to launch an Oncotype DX test for prostate cancer in 2013. This, said Ro, may also turn out be a heavy expense for Genomic Health. When it launched its colon cancer test, the firm's sales force was able to target the same oncologist community to which it had sold its breast cancer test. With the prostate cancer test, though, Genomic Health will need to sell to urologists, "and thus we estimate the sales and marketing effort for prostate cancer will be significantly more expensive than the colon cancer launch," Ro said. "[W]e believe that SG&A expenses will remain elevated as the company expands its urology sales force and marketing efforts."

Lastly, he cited a "cloudy near-/medium-term outlook for the reimbursement of genetic testing." As the Centers for Medicare and Medicaid Services tries to sort out how to pay for molecular diagnostic tests, comments from CMS about its reimbursement plans for multi-analyte algorithm assays "amplifies the level of uncertainty surrounding the future of reimbursement for Oncotype assays," Ro said. "In effect, CMS has taken the stance that it will not provide incremental reimbursement for the mathematical aspect of this test."

Because Genomic Health's tests are used mainly as risk assessment tools, justifying their use to clinicians and payors is "a complex and costly process," he said. "We believe [Genomic Health] has reached a transitional stage that will require a greater level of sustained investment than consensus expectations currently reflect."

Shares of Genomic Health on the Nasdaq were up about 1 percent at $34.22 in morning trading.

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