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Macquarie Begins Coverage on Genomic Health, Myriad Genetics

By a GenomeWeb Staff Reporter

NEW YORK (GenomeWeb News) – Macquarie Capital today initiated coverage on five clinical laboratories, which included molecular diagnostics firms Genomic Health and Myriad Genetics.

The investment firm also began covering Bio-Reference Laboratories, Laboratory Corporation of America, and Quest Diagnostics.

In a research note, analyst Dane Leone forecast a growth rate of 5 percent in the US clinical diagnostics services space through 2019 with drivers including an aging population; the US Patient Protection and Affordable Care Act passed last year, which is expected to increase the number of people covered by medical insurance; and "a paradigm shift … in clinical medicine as treatment decisions become increasingly tailored to populations defined by biologic profiles."

Among the firms Macquarie began covering today, Leone called Genomic Health and Quest the top picks.

He initiated coverage of Genomic Health with an "Outperform" rating and a 12-month target share price of $34, calling the company "the best way to invest in a shift of medical practice towards a personalized treatment program."

He said that the stock is "significantly" undervalued, and added that the company's Oncotype Dx remains underpenetrated in the node-negative and estrogen receptor-positive breast cancer patient population in the US.

In addition, Leone said that adoption of Oncotype Dx for colon cancer could be accelerated with the publication of the QUASAR validation study results along with the launch of the company's MMR test later this year.

The QUASAR study is a trial to determine the size and duration of survival benefits from adjuvant chemotherapy for colorectal cancer patients with a low risk of recurrence. Genomic Health conducted a clinical validation study using about 1,200 stage II colon cancer patient samples from the QUASAR trial and expects to publish results sometime this year.

Leone also noted that Genomic Health is developing a second-generation test to predict the benefits of oxaliplatin, a colon cancer drug. The company is looking at a 2013 launch for the test in stage II and stage III colon cancer patients.

He also noted collaborations Genomic Health has with pharmaceutical firms, such as its alliance with Pfizer to develop a test to predict the risk of recurrence following surgery for patients with stage I through stage III renal carcinoma, clear cell type, which has not metastasized. Genomic Health is currently developing a clinical validation study.

It also is collaborating with Bristol-Myers Squibb and ImClone Systems on a genomic test to predict patient response from Erbitux (cetuximab) therapy for colorectal cancer.

"Given [Genomic Health's] robust clinical test pipeline, ongoing collaborations with Pfizer and Bristol-Myers Squibb, and our estimated … 60 percent operating margin [that Genomic Health] could achieve integrated in a commercial collaboration, we think the company is truly a unique asset within the clinical lab industry," Leone said.

He was more cautious with Myriad Genetics and gave the DNA testing firm a "Neutral" rating and a 12-month target share price of $20. Myriad gave its oral argument earlier this week in the Court of Appeals for the US Federal Circuit in its battle with the American Civil Liberties Union over the BRCA 1 and BRCA 2 gene patents. In his report, Leone expressed concern about Myriad's BRCAnalysis franchise, saying it "has multiple risks over the next several years."

While he estimated BRACAnalysis revenues would grow at about 10 percent compounded annually during the next three years, rapid advances in genetic data analysis could mean that Myriad will have to compete with other service providers starting in 2014, and the company may be forced to lower its commercial list price for the product to about $1,000 from its current price of more than $3,000.

As its lawsuit with ACLU also drags out, it may take several years for a resolution to be reached, further hurting its market position in the BRCA test space, Leone said.

Myriad has emphasized its strategy to move into Europe, and a development pipeline that moves beyond BRACAnalysis, but according to Leone, "the company will need to make a transformative acquisition to mitigate its risk of a large revenue cliff if it eventually loses its BRCA 1 and 2 testing monopoly."

Myriad is currently collaborating with Abbott and AstraZeneca on the use of BRACAnalysis as a companion diagnostic for PARP inhibitors. If clinical trials by the drug firms for their products are successful, they may boost Myriad's sales. Leone said he does not expect any meaningful results from the trials to be reported before late 2012.

Leone also initiated coverage of LabCorp with an "Outperform" rating and a 12-month share price target of $110. Bio-Reference was given a "Neutral" rating with a $25 target, and Quest was initiated with an "Outperform" rating and a $70 target.

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