Myriad Genetics Is a Biotech Buy

by Hilary Kramer | June 5, 2012 10:45 am

Myriad Genetics (NASDAQ:MYSG[1]) makes tests that analyze genes and their mutations to assess a person’s risk of developing a certain disease, as well as how the disease may progress and its chances for recurrence. The tests also enable “personalized medicine” by helping doctors know which drugs are best suited for a particular patient’s genetic makeup, and they can also help determine optimal dosing and reduce side effects.

Myriad has nine tests on the market. The most important by far is its BRACAnalysis, which brings in 88% of the company’s revenues. The test costs $3,340, and it is covered by all major insurance companies and health maintenance organizations in the United States.

BRACAnalysis analyzes the BRCA1 and BRCA2 genes to assess a woman’s risk of developing hereditary breast and ovarian cancers. A woman who tests positive for a mutation in the genes (called a “deleterious mutation”) has an 82% likelihood of developing breast cancer and a 44% risk of developing ovarian cancer.

Those are scary numbers, but here’s the good news – and to me, compelling evidence of the great value in diagnostic tests: A woman who has a mutation can take steps to significantly decrease the chances that she gets cancer.

Women with a high risk of developing breast cancer but who have no symptoms can reduce their risk by about 50% with appropriate preventive therapies, according to The Journal of the National Cancer Institute. Similarly, research published in the New England Journal of Medicine showed that women with genetic mutations who have not developed symptoms of ovarian cancer can lower their risk by approximately 60% with preventive therapies.

Myriad has one other major testing product called Colaris, which analyzes genes for mutations that increase a person’s risk of developing colorectal cancer or uterine cancer. Patients who have a mutation in one of the colon cancer genes have a greater than 80% likelihood of developing the disease, and women with a mutation in the uterine cancer genes have a 71% chance of developing the cancer.

Colon cancer is very preventable thanks to early screening and polyp removal. Uterine cancer is a bit tougher to treat, though more aggressive screening can help with early detection, and there is also the option of a hysterectomy.

Myriad’s other testing products look for genetic mutations that can cause melanoma and pancreatic cancer. Its personalized medicine products include OnDose, which helps doctors manage chemotherapy to maximize effectiveness and minimize side effects; Prezeon, which measures loss of function in a gene that helps suppress tumors; and TheraGuide, which assesses a person’s risk of developing a severe reaction to a certain kind of chemotherapy. One product, Prolaris, measures gene expression to help predict disease outcome in prostate cancer.

Three Avenues to Growth

Myriad has a three-pronged approached to growth.

First, they expect to continue growing current products in existing markets (primarily the U.S.) as testing becomes more widely used and demand increases as the population ages.

Second, they want to grow their products internationally. Foreign revenues are minimal right now, so there is plenty of opportunity. Management’s hope is that revenues from outside the U.S. will grow from virtually nothing currently to $15 million by 2015. Myriad has five country managers who recently completed an orientation and training program at the company’s corporate headquarters at Salt Lake City and have returned to France, Germany, Italy, Switzerland and Spain to grow the business in those locations. The company eventually wants to be in Latin America and Asia as well, two strong growth opportunities, and is building its marketing capabilities in Europe.

Third, Myriad continues to develop tests for more and more diseases. MYGN has an industry-leading 13 potential tests in the pipeline. By next year, the company hopes to offer a melanoma test, which will be launched simultaneously with a quantitative PCR test, which is a test that amplifies DNA to help diagnose hereditary diseases.

Also scheduled to be launched in 2013 is a lung cancer test following the anticipated release of a peer-reviewed study. Myriad is also working on tests in diabetes, depression and rheumatoid arthritis (RA).

Management has made a few important acquisitions in recent years to boost growth. One year ago, on May 31, 2011, the company bought privately held Rules Based Medicine (RBM) for approximately $80 million. This acquisition greatly expanded Myriad’s pipeline, and RBM brought strategic collaborations with over 20 major pharmaceutical and biotechnology firms.

The entity operates as a wholly owned subsidiary known as Myriad RBM. Myriad also made a $25 million investment last September in Crescendo Bioscience, which develops diagnostic tests for autoimmune disorders. Myriad has exclusive rights to acquire Crescendo within three years.

One important area for cutting-edge healthcare companies is patent protection, and Myriad’s is strong. Patents covering its BRACAnalysis are good through as late as 2028, and protection for Colaris patents continue as late as 2026.

A related development we need to be aware of is a lawsuit brought by Molecular Pathology, which is challenging 15 of Myriad’s 23 patents related to BRACAnalysis. Myriad won this case in the U.S. Court of appeals last year, but the Supreme Court remanded the case back to an appellate court in March. The stock did not react negatively to the ruling; in fact, it was up the day the decision was announced.

MYGN did drop over 10% in three days the week before when the Supreme Court ruled unanimously in an unrelated case. The judges said that a blood test developed by Prometheus Technology was not eligible for patent protection as it merely reflected a law of nature. While we need to keep an eye on the suit challenging Myriad’s patents, I believe the courts understand the importance of protection – without it, innovation and the development of future tests would suffer because of a lack of a profit motive – and will uphold patent protection when warranted. It’s also worth nothing that MYGN subsequently recovered all of its lost ground after the initial drop following the Supreme Court’s ruling.

Myriad Genetics’ growth has been impressive as more patients and physicians look to genetic testing. Sales soared 175% from $145.3 million in the fiscal year ended June 30, 2007 to $402 million in the year ended last June 30. Operating income increased 388% over that same time, jumping from $32.3 million to $157.8 million as the company leveraged the costs of the tests while also keeping up investments in research and future growth.

Earnings more than doubled from 52 cents to $1.10 per share. They were actually as high as $1.54 per share in the 2010 fiscal year but fell back to $1.10 per share last year as the company recognized a full tax rate for the first time.

Through the first nine months of the current fiscal year, strong sales growth continued. Revenues increased 23% to $363 million, with BRACAnalysis sales growing 17% and Colaris revenues jumping 51%. Profitability was limited by increased R&D expenses and the acquisition of Rules Based Medicine, which contributed little in the way of revenue growth but added to expenses.

Still, operating income increased 15% to $133 million, and earnings were up 20% to 96 cents a share. Comparisons from the prior year were helped by the company’s stock repurchase program, which I like to see, that resulted in a 6.8% decline in the number of shares on the market. At the end of the last quarter, management raised earnings guidance for the current fiscal year to $1.29 per share to $1.31, up from $1.20 per share to $1.25 per share.

I also like the strong balance sheet. MYGN has cash and short- and long-term marketable securities of nearly $467 million, or $5.55 a share, and no long-term debt. This should enable the company to easily finance future acquisitions or share buybacks.

Myriad Genetics has a solid record of success with its current products on the market and the best pipeline in the growing genetics-testing industry. I look for continued solid growth from this unique franchise that helps prevent terrible diseases. It’s also a good stock for the current environment. Investors often turn to healthcare stocks in times of uncertainty, as people never stop needing healthcare. In addition, MYGN has little current exposure to Europe. Buy MYGN under $27 for an initial target of $36.

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