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Genomic Health: Advantage Lost

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earlier this year, a physician I know who specializes in medical genetic testing told me that in 2001, it was possible to sequence every gene in a human cell at a cost of $100 million.  Today, she can do the same thing for less than $3,000.  And the price continues to drop. 

This precipitous decline in the cost of genetic testing has opened a potentially huge door for the genetic testing of cancer.  Specifically, it may now be possible to predict which cancer patients will respond to a particular chemotherapy and which won’t -- a big deal considering the cost and side effects of chemotherapy.  The medical phrase for all this: gene expression profiling.  Some believe the market for gene expression profiling, or related genetic testing, will grow at over 13% a year for the next three years. 

Breast cancer exemplifies this potential.  Patients who have relatively small tumors, no lymph node metastasis and express a protein called estrogen receptor pose a treatment dilemma. Most of these patients will do well, but some will have a recurrence and should be treated more aggressively when they are first diagnosed. 

Currently, Genomic Health (NASDAQ: GHDX) offers Oncotype DX as a gene expression profile assay that evaluates 21 genes in breast cancer and then assigns a recurrence score for each patient.  This way, each individual patient has a numerical value assigned to their chance of recurrent cancer.  This recurrence score is further subdivided into high, intermediate and low risk categories.  Oncologists use this information when deciding if chemotherapy should be offered and, if so, what kind of drugs will best benefit the patient.  Oncotype DX is performed on formalin fixed, paraffin embedded tissue, standard processing procedure for virtually every pathology lab in the country.  Currently, Oncotype DX is the most frequently used gene expression profiling test used in the United States.  It’s also specifically recommended in the National Comprehensive Cancer Network treatment guidelines for breast cancer.

GHDX currently enjoys the fruits of this dominant position.  According to the company’s 2011 annual report, corporate revenues grew by 85% that fiscal year and secured the second straight year of profitability.  Projected revenues indicate continued growth, but earnings will be below 2011 levels.  GHDX carries no debt, has built its cash reserves, and has recently introduced Oncotype DX products for colon cancer and pre-invasive breast cancer, better known as ductal carcinoma in situ.  More products are in the pipeline, notably for prostate cancer.  No wonder the stock is up 64% over the past 12 months and is selling for 130 times earnings and a PEG of 5.75.

So what’s the worry?  In a word: Mammoprint, a gene profiling assay made by the private firm Agendia.   

In the Oct. 15 edition of the journal Cancer, researchers from the University of the Sciences in Philadelphia studied the cost-effectiveness of Oncotype DX and Mammoprint in a head-to-head comparison.  Their conclusions: Mammoprint was more cost-effective than Oncotype DX.  Mammoprint studies 70 genes that, according to a company spokesman, are associated with the process of cancer metastasis.  Agendia considers Mammoprint a second-generation gene profiling assay relative to Oncotype DX.  Mammoprint claims it can confidently classify 92% of breast cancer patients as either high or low risk of recurrence, with only 8% classified as borderline or intermediate risk.  This compares favorably to Oncotype DX, which categorizes between 20% and 30% of patients as intermediate risk.  Furthermore, Mammoprint used to require fresh tissue for analysis; no more.  They recently rolled out Mammoprint for formalin fixed paraffin embedded tissue and effectively neutralized Oncotype DX’s advantage in tissue handling requirements. 

Will Mammoprint bankrupt GHDX?  No.  However, costs count in health care, and if a widely-read journal like Cancer shows Mammoprint is more cost-effective than Oncotype DX, that will surely attract interest.  The fact that Mammoprint studies more genes, can stratify more patients clearly into high or low risk categories, and can utilize routinely processed tissue makes Mammoprint a serious challenger to Oncotype DX and a threat to GHDX's profits. 

Undoubtedly, GHDX will challenge the Cancer study.  However, the Cancer study was so independent, Agendia’s spokesman didn’t even know it was published.  This lends significant credibility to its conclusions.  Currently two major trials are studying either Oncotype DX or Mammoprint, and there will surely be others.  Given GHDX’s high P/E ratio and expectations underpinning GHDX’s stock, these trials and Mammoprint merit watching.  Taking some profits from GHDX may not be a bad idea, either.  Oncotype DX has lost some key advantages over Mammoprint; that can’t carry a good prognosis.

dylan588 has no positions in the stocks mentioned above. The Motley Fool owns shares of Genomic Health. Motley Fool newsletter services recommend Genomic Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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