Splicing & Dicing Myriad Genetics Amidst the Angelina Jolie Disclosure
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Myriad Genetics (NASDAQ: MYGN) and the topic of genetic testing to determine one's risk of disease was in the spotlight last week thanks to film star Angelina Jolie. Myriad's no stranger to the biotech spotlight given its Supreme Court case pertaining to whether human genes can be patented, but Jolie put genetic testing front and center in the public view.
One has to give credit to Jolie for her disclosure, via a New York Times op-ed, that she had a double mastectomy as a preventive measure to reduce her hereditary risk of breast cancer. Jolie made the decision after testing positive for a faulty BRCA1 gene, giving her an 87% lifetime risk of developing breast cancer and 50% risk of developing ovarian cancer. Her mother, actress Marcheline Bertrand, died at age 56 of ovarian cancer.
Jolie didn’t mention the name of the company that provided her test. She didn’t have to, as Myriad Genetics has exclusive rights to the BRCA1 and BRCA2 genes.
Let's splice and dice Myriad as a possible investment.
Myriad, with a market cap of $2.6 billion, is a molecular diagnostic company involved in developing and marketing medical tests. The Salt Lake City-based company was founded in 1991. It operates primarily in the U.S., though it opened a lab in Europe last year.
Myriad's tests fall into these categories:
- Predictive tests: Analyze genes and proteins to predict a person’s likelihood of developing a certain disease.
- Personalized medicine tests: Determine a patient’s likelihood of responding to a particular drug therapy.
- Prognosis tests: Assess a patient’s risk of disease progression and recurrence.
Its subsidiary, Myriad RBM, offers biomarker and companion diagnostic services to pharmaceutical and biotech companies.
There are currently no direct competitors, though that could change depending upon the Supreme Court ruling (discussed below) pertaining to patents on the BRCA genes.
There are companies that provide sequencing of a person's entire genome. One company is Illumina (NASDAQ: ILMN), which derives about 90% of its revenue from selling instruments and consumables used in genetic analysis, and 10% from services, such as genotyping and sequencing. However, in addition to costs being high (though they're dropping rapidly), there's the patent infringement question. Legal experts say it's not clear whether sequencing the entire genome and then providing specific information on mutations in the BRCA genes would violate Myriad's patents.
Patents aside, Myriad believes these companies are several years away from being able to provide clinical-level analysis of the sequenced genome. Myriad's moat to keep competitors at bay isn't entirely in its patents, it's also in its information. The company has built up a significant database, which is used as a basis of comparison for the mutated BRCA genes.
Competition -- Breaking News
Bloomberg reported that it was announced on May 20 that the U.K. will pilot an Illumina genetic test related to breast and ovarian cancer. As per Bloomberg, "the tests will help cancer patients and their doctors better identify appropriate treatments and help determine if relatives have cancer risk." (Italics are mine.) I'll be digging into this. If that's accurate, the test is not "direct" competition with Myriad's tests, though "relatives" suggest an overlap. Myriad's BRCA gene tests determine the hereditary risk of a person developing one of these diseases. That said, the development sounds like a potential win for Illumina. AND, depending upon the Supreme Court ruling, Illumina could extend its offerings to directly compete with Myriad's BRCA tests. Keep in mind, it’s just in the pilot stage, and currently Myriad’s business is heavily concentrated in the U.S.
A myriad of eggs in one basket
The current revenue mix:
BRACAnalysis was the company's first test, launched in 1996. It provides a complete sequencing of the BRCA1 and BRCA2 genes, which are associated with hereditary breast and ovarian cancer.
BART is an advanced version of the BRACAnalysis. It provides an additional procedure to identify five common large rearrangements in the BRCA1 gene. It's likely Jolie took this test. The BRACAnalysis costs about $3,000, if not covered by insurance, while the BART tacks on about $700.
So, 85% of revenue is generated from these two related products. Revenue is expected to be in the $595 million-$600 million range for fiscal 2013, so we're talking a half-billion-dollar business from these two tests. That's why the Court case pertaining to the BRCA patents is so important.
COLARIS predicts a person's likelihood of developing hereditary colorectal and uterine cancer. The "Other diagnostic tests" includes tests such as MELARIS, which is for hereditary melanoma.
The companion diagnostic services revenue got a bump from the company's work for Sanofi on diabetes.
Patenting of human genes & the Supreme Court case
Biotech companies have been patenting human genes for 30 years, though the practice has always been controversial.
Myriad's first BRCA1 patent was granted in 1997, and its first BRCA2 patent in 1998. The first patents begin to expire in 2014, though the company has said its patent protection should last to at least 2018.
In 2009, The Association for Molecular Pathology sued Myriad challenging seven U.S. patents on the BRCA1 and BRCA2 genes. The district court ruled two patents invalid. Myriad won the appeal. The case (in a slightly different form) escalated upward. The Supreme Court heard arguments in April, and a decision is expected by June.
Based upon a recent similar case, it's generally expected the Court will rule in some halfway manner -- as in human genes can be patented, but shouldn't have the same degree of protection as other things.
Most expect the Court to stay narrowly focused on human genes. If it does stay narrowly focused on human genes, many legal experts believe the impact will be less significant than many fear. A Bloomberg article says it well:
"Gene patenting peaked in the 1990s, meaning many patents have expired or are nearing the end of their 20-year life, and most of the human genome is now in the public domain."
The company released its fiscal Q3 2013 earnings on May 7. The stock rose nearly 18% that week following the company's 17% earnings beat. Revenue increased 21% to $156.5 million, while EPS rose 34% to $0.46. The company also increased its revenue and earnings guidance for the full fiscal year. If it meets guidance, revenue will be up 20%-21% and earnings up 27%-28% from the prior year.
The stock's trading at a P/E of 21 and forward P/E of 17.8 (as of market close May 17). This is reasonable, given earnings, a clean balance sheet, and what looks like a decent pipeline. Naturally, the court case uncertainty is keeping a lid on the stock price.
The company has been buying back stock. Between May 2010 and March 2013, it repurchased $525 million in stock. In February 2013, its board authorized the repurchase of an additional $200 million. It's currently a $2.6 billion market cap company -- so these are significant buy backs.
Insiders have been selling stock, likely due to uncertainty surrounding the Court ruling. They sold 72% of their shares over the last six months, per Yahoo! Finance.
Foolish bottom line
Myriad's prospects depend upon the The Supreme Court ruling, expected by June. The only question is the extent. The ruling is very important for the short and intermediate term. It shouldn't have much effect on long-term prospects. Even if the Court ruling is "extremely" favorable to Myriad, the very best case scenario is Myriad's patent moat keeps "direct" competitors at bay until 2018 (Myriad's date, so likely optimistic.) Though Myriad's moat doesn't lie entirely with its patents, as discussed.
Investors (in both Myriad and Illumina) need to keep an eye on Illumina's UK pilot program related to hereditary breast and ovarian cancer. This just-announced development could have material effects on the prospects for both companies.
So, unless one is a higher-risk speculator or has insights into the Court ruling, most potential Myriad investors should sit tight until after the ruling. Though I've not done an in-depth analysis on Illumina, it's certainly looking more attractive based on the UK pilot program news.
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BA McKenna has no position in any stocks mentioned. The Motley Fool recommends Illumina. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!