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Oppenheimer Initiates Coverage of Genomic Health at Perform, Invitae at Outperform

NEW YORK (GenomeWeb) – Oppenheimer has initiated coverage of Genomic Health with a rating of Perform, calling the company a leader in diagnostic testing. The investment bank also initiated coverage of Invitae with a rating of Outperform and a $21 12- to 18-month price target, noting that the company will benefit from several growth trends in the genetic testing sector.

In a note to investors yesterday, Oppenheimer analyst Kevin DeGeeter said that Genomic Health occupies a leadership position in the diagnostics sector, particularly in testing for predicting response to certain therapeutics and for staging of oncology patients.

"The company was an early mover in recognizing the shift in payor attitudes toward a higher threshold for clinical utility and in potential for value-based pricing," he wrote. "This focus on value-based reimbursement culminated in June 2018 with presentation of top-line data from the TAILORx study, which, in our view, solidifies GHDX's Oncotype DX Breast as the best validated test for predicting response to chemotherapy in women diagnosed with node-negative invasive breast cancer."

DeGeeter also noted that Genomic Health's share price has risen 76 percent since the TAILORx data was released compared to a 5 percent decline for the S&P 500 in the same period, and he believes the stock is fully valued. Also, given that US sales of Oncotype DX Breast account for 80 percent to 85 percent of total revenue, Oppenheimer expects that a slowdown in the growth of the diagnostic's revenues will result in a decline in total revenues for the company over the next two to four quarters, and a potential pullback in share price.

"The current 2019 revenue consensus of $441.1 million seems aggressive and, in our view, could move lower following issuance of 2019 guidance. Our 2019 revenue estimate is $434.8 million," DeGeeter wrote. "We believe fundamentals of the business are healthy and upside over the intermediate term could come from pipeline programs, including: 1) Oncotype DX GPS prostate, if Medicare reimbursement translates to increased coverage from private payors; and 2) Oncotype DX AR-V7 beginning in 2H19."

However, he also added that even though Genomic Health has historically expanded its pipeline through internal development, the current pipeline offers limited upside, and the firm should look to expand its testing menu "more aggressively through acquisitions (or potentially look to sell the company)."

In his note on Invitae, DeGeeter wrote that the firm will likely benefit from several trends that are driving overall growth in the genetic testing sector: the declining cost of goods and prices for genetic testing; growing consumer demand for genetic information, particularly in healthcare sectors such as pediatrics, childbearing, chronic disorders, and acute illness; and the growing cash-pay segment.

"We believe NVTA is the only company truly positioned to benefit from these trends due to management's focus on: 1) competing on cost of goods and price, 2) expanding breadth of test menu and 3) access to capital to fund DTC advertising," DeGeeter said.

Oppenheimer's forecast calls for Invitae to record 2019 revenues of $206.8 million, based on growth expectations for the firm's reproductive health channel. "Our investment thesis assumes that for genetic testing services, unlike other parts of healthcare, there is elasticity of demand, and test volume growth for the group will surprise to the upside as prices continue to fall," DeGeeter added. "In 2018, NVTA recognized limited commercial synergies from the move into reproductive health testing in 2H17. With the launch of expanded carrier screening (2H18) and noninvasive prenatal screening (NIPT) early in 2019, we expect women's health to be a potential source of revenue upside in 2019."

He added that acquisitions could be an appropriate way for Invitae to expand its women's health franchise, particularly if these transactions included commercial infrastructure that provided an immediate contribution to revenue.

Genomic Health's shares were down nearly 1 percent to $66.38 in midday trading on the Nasdaq. Invitae's shares were up 5 percent to $11.81 on the New York Stock Exchange.