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Key Analyst Sees Opportunity in Diagnostics Sell-Off

The unexpected reimbursement rate proposals by the Center for Medicaid (CMS) hit the diagnostic sector on Monday. Several firms, including Veracyte Inc. (NASDAQ: VCYT), CareDx Inc. (NASDAQ: CDNA) and Genomic Health Inc. (NASDAQ: GHDX) issued press releases responding to proposed 33% to 79% price reductions for their tests in 2016.

What’s positive is that the CMS is trying to relegate gap-fill pricing standards to private payers. Janney Capital specifically likes Thermo Fisher Scientific Inc. (NYSE: TMO), Agilent Technologies Inc. (NYSE: A), Veracyte and T2 Biosystems Inc. (NASDAQ: TTOO) in the sell-off.

Gap-fill pricing is being used when no existing tests possess similar technology and methodology. Accordingly, under this scenario, the onus of establishing reimbursement rates falls to the Medicare Administrative Contractor (MAC). The decision by the CMS to implement crosswalk pricing departs from MAC determined reimbursement rates to private sector rates.

Janney detailed in its report:

CMS is proposing to reduce reimbursement for Veracyte’s Afirma GEC from $3,200 to $2,151 (~33%). We estimate ~20% of Afirma testing revenue comes from Medicare. Blending the reimbursement reduction with percentage of Medicare represents an approximate headwind of 6-7% for Veracyte’s 2016 revenue estimates. With the majority of Afirma revenue coming from private payers reimbursing at a higher price point than Medicare, we believe Veracyte is well positioned. We maintain our fair value estimate for Veracyte of $11 per share, which assumes a 4.4x on fiscal 2017 revenue.

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Genomic Health also noted the confusion around the unexpected decision by the CMS to depart from local MACs determining reimbursement rates. Genomic Health’s Oncotype DX breast cancer was reduced by 15% and the Oncotype DX colon cancer was reduced by 79%.

Separately Janney also said in the report:

T2 Biosystem’s (BUY; FV $25) success is based on hospital purchase decisions, not the CMS. The proposed legislation specifically excludes hospital labs from submitting volume and pricing. We view its inclusion in Monday’s selloff as a buying opportunity. Thermo Fisher (BUY; FV $157) and Agilent (BUY; FV $46) are operating in more mature DGx markets in which novel test pricing will have low impact.

Shares of Veracyte were down 3.5% to $5.32 on Tuesday morning. The stock has a consensus analyst price target of $12.14 and a 52-week trading range of $5.16 to $12.47.

Thermo Fisher shares were up 1.7%, at $120.13 in its 52-week trading range of $107.33 to $141.25. The stock has a consensus price target of $153.81.

Shares of Agilent were up 1.2% to $33.78. The consensus analyst price target is $45.32, and the 52-week range is $33.25 to $43.59.

T2 shares were up 0.3%, at $9.29 in its 52-week range of $9.00 to $24.04. The consensus price target is $19.67.

Shares of Genomic Health were up 6.8%, at $22.86 in its 52-week range of $20.35 to $37.74. The consensus price target is $30.45.

CareDX shares were down 3%, at $3.98 in its 52-week range of $3.70 to $8.00. The consensus price target is $10.20.

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By Chris Lange