Genetic testing: Credit Suisse says Genomic Health (GHDX) is a best-in-class asset.

Credit Suisse

Technological advances in areas such as molecular diagnostics and gene sequencing have led to an explosion of new diagnostic tests in recent years.

We are initiating coverage on three additional companies within the diagnostics space, with a positive bias toward not just companies that leverage these novel technologies but also those whose tests provide clear information that a physician can act on and do so in a way that is economically attractive.

The rapid proliferation of genetic testing has attracted the attention of many players in the broader health-care field. First, insurers have become increasingly concerned by the costs of these new tests, especially because the true clinical utility of many of these tests is not often clear to payors or physicians. Second, the Food and Drug Administration has expressed a clear desire to increase its regulation of genetic tests, especially those that can directly affect clinical decision making or those that are being targeted directly to consumers. Third, the growth of the industry has led to an increase in legal actions by various players, as the ability to patent genetic material in general and the strength of various patents has been called into question.

Considering all of these factors, we believe that, for companies to succeed in the new environment, they will need to generate strong clinical data that clearly illustrate the utility of their tests, demonstrate that their tests have an attractive economic value proposition, and maintain legal, technological, or other barriers to ensure that their tests are not quickly replaced by competing offerings.

Overall, our due diligence leads us to believe that Genomic Health (ticker: GHDX) shares will outperform, Sequenom (SQNM) shares will underperform and Myriad Genetics (MYGN) shares will trade in-line with the rest of our coverage universe.

Genomic Health (rated at Outperform, $43 target price): Best-in-class asset (Oncotype DX Breast) and strong history of commercial execution should allow for continued growth.

Myriad (rated at Neutral, $28 target price): BRACAnalysis [a woman's risk of developing breast or ovarian cancer based on detection of mutations in the BRCA1 and BRCA2 genes] growth should continue, but near-term overhangs and long-term uncertainties keep us on the sidelines.

Sequenom (rated at Underperform, $4 target price): MaterniT21 PLUS test [for increased amount of chromosomal 21, 18, and 13 material] should lead the way in a high-volume market, but aggressive competitive dynamics may limit the test's commercial potential.