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Here's Why Genetic Testing Stocks Rose as Much as 25.4% in July

What happened

Shares of genetic testing stocks rose as much as 25.4% last month, according to data provided by S&P Global Market Intelligence. Genomic Health (NASDAQ: GHDX) led the pack after reporting record second-quarter 2019 operating results and plans to combine with Exact Sciences (NASDAQ: EXAS), which saw its shares decline by 2.5% in July. But that was followed by a 14.4% gain for shares of Invitae (NYSE: NVTA) after the company moved one step closer to fulfilling its vision of offering genetic testing services directly to individuals, which represents the single-largest market opportunity for the industry. And NeoGenomics (NASDAQ: NEO) stock rose 11.1% last month after reporting solid Q2 operating results as well.

Image source: Getty Images.

So what

Genomic Health kept shareholders happy by continuing its impressive growth trajectory. The business reported record quarterly revenue of $114 million, a year-over-year increase of 19%, and delivered first-half 2019 revenue of almost $223 million. First-half operating income came in at $27 million, compared to just $2.7 million in the year-ago period. The operational strength was driven by solid traction in the most-watched areas, including invasive breast cancer tests, early-stage prostate cancer tests, and international markets.

That prompted management to raise its full-year 2019 guidance for revenue and net income, something shareholders have become accustomed to in recent quarters. Genomic Health now expects revenue in the neighborhood of $450 million, compared to a previous midpoint of $442 million, and net income of about $58 million, compared to a previous midpoint of $51 million. The business exited June with $244 million in cash.

As strong as operations were in the first half of 2019, investors were more excited about the news that Exact Sciences has agreed to join Genomic Health for $72 per share. If approved by regulators, the combined company would be the leading cancer genetic testing business by far, with annual revenue of $1.6 billion and annual gross profit of $1.2 billion.

Image source: Getty Images.

Cancer genetics-focused peer NeoGenomics reported impressive Q2 2019 operating results too. The business delivered $101.7 million in revenue, a quarterly record marking 50% year-over-year growth. The services-based company reported $7 million in first-half 2019 operating income, compared to $3.3 million in the year-ago period.

The solid start to the year shows NeoGenomics is capitalizing on its recent acquisition of Genoptix, which is still being integrated, and gave management the confidence to increase full-year 2019 guidance. The business now expects annual revenue in the neighborhood of $395 million, and annual net income of about $1 million.

Meanwhile, Invitae doesn't report second-quarter 2019 operating results until Aug. 6, but it launched a new service in late July. The company is making a massive bet that the future of genetic testing will empower individuals to order tests without having to go through insurance companies or even their own clinicians. The new model could result in more informed patients (they'll still receive genetic counseling from Invitae), earlier diagnosis of diseases, and better clinical outcomes. It could also make genetic testing vastly cheaper if scaled properly.

That's why the business launched Detect, which is different from the direct-to-consumer channel launched in June. The platform provides no-charge genetic testing to individuals in the areas of muscular dystrophy, hereditary prostate cancer, cardiomyopathy and arrhythmia, and lysosomal storage diseases. Detect is free because sponsors cover the cost and receive unidentifiable medical information in return, which means patients only have to enroll in the testing program through their clinician. Without the barrier of insurance coverage, it could prove popular. Investors are eager to see if Invitae's new bets to improve access to genetic testing pay off, especially since they underpin massive growth expectations.

Now what

The genetic testing industry has proven volatile but is generally delivering impressive returns to investors with a long-term mindset. Companies such as Genomic Health, NeoGenomics, and Invitae are revolutionizing how cancer is treated, when diseases are diagnosed, and who has access to the wealth of molecular data running through patients. Given recent operational updates, they may just be getting started.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Genomic Health. The Motley Fool has a disclosure policy.


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