A Fast Growing Diagnostics Company but Why is it So Cheap?
Lee is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Myriad Genetics (NASDAQ: MYGN) offers an interesting investment proposition. On the one hand it is a fast growing and highly cash generative company with strong future prospects. On the other, it is a company which is fraught with legal challenges to its patents and whose growth prospects are largely dependent on the reimbursement agenda of the managed care industry. Sometimes the hardest part in investing is quantifying risk and it sure isn’t easy with Myriad.
Legal Challenges
In 2009, the American Civil Liberties Union (ACLU) and Public Patent Foundation (PUBPAT) filed a lawsuit against Myriad and claimed that patents on genes (BRCA1 & BRCA2) which are associated with breast and ovarian cancer are unconstitutional and shouldn’t be awarded. Subsequently a District Court judge surprised most commentators and issued a ruling which declared these patents invalid in 2010.
The Court of Appeals for the Federal Circuit (a higher court) reinstated most of Myriad’s patents in 2011. Then in March 2012 the Supreme Court decided to order the Federal Circuit court to make a new review of a case with Myriad. This decision is due next year. As of now the salient patents are upheld and Myriad is believed to hold other patents with which it can defend its molecular tests.
Myriad Genetics Business
The molecular diagnostics test developer is an attractive company and there are lots of growth opportunities here. Establishing sales in Myriad's products takes time as it is intrinsically difficult to convince people of the merits of preventative measures.
Myriad specializes in genetic tests that analyze the risk of a person, with hereditary cancer, developing the given condition. Over 90% of Myriad's revenues are generated via insurance reimbursement and this gives the company very favorable cash flow generation, but getting reimbursement status is also a key differentiator of future growth.
One longer term worry is what Life Technologies (NASDAQ: LIFE) and Illumina Inc (NASDAQ: ILMN) are doing in terms of reducing the costs of DNA sequencing. The cheaper it gets, the more political pressure will build on the industry to allow research into genetic materials that Myriad has patented. The flip side of the argument is that companies like Myriad are trying to protect huge sums of money invested in intellectual property.
The two big revenue generators are BRACAnalysis (breast and ovarian cancer) with 81.7% of revenues and Colaris/Colaris AP (colorectal and uterine cancer/ colorectal polyps) with 8.7% of revenues. For example, in this quarter, BRACAnalysis year on year sales grew by 17% and Colaris/Colaris AP by 51%.
Myriad's tests usually take time to reach mature sales as they need to be explained to the medical community and they don’t come cheap. Let’s recall that they test the probability of a person developing the cancer. This may seem somewhat superficial, but in actuality, the tests are highly accurate.
Turning to Myriad's strategic game plan to drive long term growth, it has three main points
- Launch new tests
- Grow existing product's range
- Expand into accommodative European markets
Is Myriad Achieving Strategic Aims?
Looking at the objectives in turn, there are two molecular tests in late pipeline stages. One is a lung prognostic test which is intended to predict survival rates in lung cancer patients. The second is a test to differentiate the diagnosis of patients with major depression or with bipolar induced depression. In addition the company continues to develop companion diagnostic tests, but revenues only represent 4.1% of sales and so far this has been a disappointing area for Myriad. I note that the aim of becoming a global leader in this field seems to have been dropped from its key strategic aims.
In summary, the pipeline is busy but then it usually is at Myriad. The question is can it monetize its products? So far only BRACAnalysis has been a big winner.
The key to growing the product sales seems to be getting reimbursement and the current hopes center around Prolaris (assesses prostrate cancer aggressiveness) and the BRACAnalysis Large Rearrangement Test (BART) which is a test given to identify mutations after BRACAnalysis testing. The feedback on the reimbursement potential Prolaris was described as ‘positive’ with managed care in the US described as satisfied that sufficient clinical validation had been submitted although, Europe requires more clinical studies.
Regarding BART, the National Comprehensive Cancer Network (NCCN) is recommending that every BRACAnalysis should be accompanied by a BART test. The aim is to get reimbursement from insurance companies and generate extra revenue from BRACAnalysis testing. I find it hard to get too excited about a test that has been sold by Myriad since 2006. It only retails for $700 and it’s not clear how many payers will agree to reimburse it or for what kind of patients.
Turning to Europe, if we go back to the chart above we can see the importance of BRACAnalysis to Myriad’s revenues. Therefore geographic expansion is another key to developing sales growth. As such the main focus is five key markets, namely Germany, Italy, Spain, France and Switzerland and Myriad has reimbursement for BRACAnalysis and Colaris in these markets and is very optimistic’ about the potential for Prolaris to get it too. I
Previously management outlined that it felt these markets represented 75% of the US market for Myriad. The challenge now is to expand test sales via educating physicians particularly to its greater efficacy and turnaround time compared with existing tests inEurope.
Where Next For Myriad Genetics?
Molecular diagnostics is an exciting area but the problem with investing in it is that you can find a super company like Cepheid (NASDAQ: CPHD) with its Genexpert system gaining strength, but it trades at such a high valuation that the slightest growth hiccup will see the stock hit hard. And it has already happened this year. Alternatively, someone like Abbott Labs (NYSE: ABT) is strong in the area but doesn’t give enough pure exposure. Perhaps after the split?
Myriad’s revenue guidance for the full year of $550-565 million was ahead of market estimates of $553 million but EPS forecasts were a little light at $1.44-148 versus $1.48 consensus. Thinking short to mid term, the company is cyclical in the sense that when the economy picks up, patients make more visits to doctor's offices but any major upside to these estimates is likely to come from positive news on BART and Prolaris reimbursements.
Myriad remains highly cash generative and it is set to grow revenues in double digits over the next couple of years. The stock is attractive but investors will have to factor in the legal and political risk in the Federal court’s decision and accept that earnings growth will still be largely dictated by the BRACAnalysis test.
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