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Tickers in this Article: ISRG, GHDX, CMN
We reaffirm our long-term 'Neutral' recommendation on Genomic Health (GHDX) following the third quarter results. Despite an impressive growth trajectory, the financial results of this molecular diagnostic company continue to depend on the Oncotype DX breast cancer test which is the crux of Genomic's growth profile.

Why the Reiteration?

While Genomic surpassed the Zacks Consensus Estimate for earnings per share in the third quarter of 2012, revenues trailed the Zacks Consensus Estimate for the second time in a row.  However, revenues increased 13% on a year-over-year basis to $58.6 million.  

Following the third quarter results (November 7, 2012), most of the estimates have been revised upwards for 2012 in the last 60 days. However, estimates for 2013 have declined over the same time frame.

Volume for Oncotype DX tests - the company's flagship product, improved 7% year over year on the back of deeper penetration in new markets. Yet, test volume declined on a sequential basis due to lower-than-expected invasive breast cancer test volume in the U.S., fewer patient visits and increasing competition.

Based on these facts, Genomic lowered its forecast for test volume for 2012. Nevertheless, we expect the test to record solid growth in the future as Genomic continues to gain additional reimbursement in the domestic as well the offshore market.

While we are wary about the company's reliance on the Oncotype DX breast cancer test, we derive comfort from the pipeline development. Genomic expects to launch its lead pipeline candidate - Oncotype DX prostate cancer test in the first half of 2013.

We anticipate that the expected launch of the prostate cancer test will increase operating expenses for the company. Moreover, Genomic is expected to incur higher costs associated with clinical studies for further portfolio expansion. These expenses are expected to weigh heavily on the company's margins and bottom-line.  

As a result, we remain on the sidelines for Genomic that carries a Zacks #3 Rank which translates into a short-term Hold rating. On the other hand, medical device stocks such as Intuitive Surgical (ISRG) and Cantel Medical (CMN) carry a Zacks #1 Rank (Strong Buy).

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