Friday, January 28, 2011

Myriad Genetics Oversold

Molecular diagnostics test developer Myriad Genetics reported results in line. This is an attractive company and there are lots of growth opportunities here. Myriad is highly cash generative and is growing revenues in the high single digits. Earnings look set for low teens growth.

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. Similarly, patients may feel more inclined to make 'out of pocket' spending for tests when they have more income. In addition, the longer term picture is exciting and supports significant upside potential.

However, the cloud hanging over Myriad concerns future competition and possible future pricing pressure should the Court of Appeals for the Federal Circuit uphold the earlier District Court decision which ruled that 7 of Myriad's patents were invalid. You can find very good commentary on it here

I think any potential investor should understand both risk and reward.

My view is that it could be some time before rival tests approach Myriad's expertise and this will require significant investment. Establishing sales in Myriad products takes time as it is intrinsically difficult to convince people of the merits of preventative measures. Nonetheless, I will note that Myriad's sales growth seems to have disappointed analysts over the last year or so.

Myriad Genetics Q2 Earnings

A brief look at earnings and guidance. Myriad's year end is in June.
  • Revenues of $104.4 vs. $98.9m estimates
  • EPS of 26c in line with estimates
  • Guidance: Full Year revenues $380-400m vs. $390m estimated
  • Guidance: Full Year EPS of 95-100c vs. 102c estimated
The market might not like Myriad guiding EPS below consensus but, if the stock is marked down notably, I intend to buy some.

Growth Drivers for Myriad Genetics

Myriad specialises in genetic tests that analyse the risk of a person, with  hereditary cancer, developing the given condition. Over 96% of Myriad revenues are generated via insurance reimbursement and, this gives the company very favourable cash flow generation. Good receivables collection has seen receivables drop to a low of 37 days sales outstanding.

The two big revenue generators are BracAnalysis (ovarian Cancer) with 89% of revenues and Colaris/Colaris AP (colorectal and Uterine Cancer/ colorectal polyps) with 7% of revenues. In this quarter, BracAnalysis year on year sales grow by 8.5% and Colaris by 3%

Colaris sales figures are disappointing (they fell sequentially) and the management said this was more to do with 'timing issues' than underlying weakness. Overall, these are good sales results considering the company reported a drop in office visits in the quarter which could have been due to bad weather.

Turning to Myriad's strategic game plan to drive long term growth, it has four main points

  1. Launch new tests
  2. Grow existing product's range
  3. Expand to become the leader in the companion product space
  4. Expand into accommodative European markets

Myriad Achieving Strategic Aims

Looking at the objectives in turn, the management confirmed that a new test will be launched in the fall. To grow products range, Myriad is trying to get BracAnalysis classified as a 'preventative' treatment so that it can be covered under the affordable care act legislation. This would be 'significantly positive' for Myriad.

Another exciting development is the Myriad marketing follow up to a major study that supports the cost effectiveness of genetic testing for hereditary colon cancer. The study is linked here

Dr. Gruber and his colleagues used a mathematical model to determine the medical and cost effectiveness of colorectal cancer genetic screening based on a simple family history. The study determined that the average cost effectiveness ratio, a measure of expenditure per life year gained by genetic testing, would be $26,000, significantly less expensive than the often-quoted benchmark of $50,000. The study further suggested that risk-assessment should begin between the ages of 25 and 35, and that genetic testing would be appropriate for those individuals whose mutation risk is 5% or greater. The study estimated that approximately 1% of the U.S. population over the age of 25, or 2.0 million Americans, would meet this criteria resulting in a potential market of more than $6 billion dollars for Myriad's COLARIS test
I would take the $6bn figure with a pinch of salt. Myriad have previously said that the Colaris test is a $400m opportunity. Nevertheless, the cost effectiveness of preventative testing is becoming more wide spread with this sort of research.

 One new announcement on this study was that it was assessed on the basis of four genes tested with a cost up to $4000. Myriad's current test analysis three genes at a cost of $3100 and Myriad intend to add the fourth gene at a cost of $1400 by the end of the year.

Myriad continues to develop companion test but this requires ongoing scientific evidence to accelerate sales. The main focus being on PARP inhibitors.

The CEO thinks that Prolaris (launched 9 months ago) has a $740m opportunity and Ondose with $420m. However, sales expansion will require more evidence.

Myriad's European Expansion

I was quite impressed with the updates on this. Myriad is keen to 'significantly' enter Europe by the end of 2012. The key target markets will be Germany, Italy, Spain, France and Switzerland. Europe is seen as 75% of the size of the US market for Myriad.

The CEO declared that he was 'ahead of plans' in Europe and that he believes that Myriad's tests could get 2000 to 2500 Euros reimbursement, this is similar to current US reimbursement.

I think they will make an acquisition in Europe, in order to establish scale and distribution quickly.
40m revs, profitable

Myriad Evaluation

The stock trades at $22.41 with a market cap of $2.07bn and an Enterprise Value (EV) of $1.56bn. Myriad expects 88% gross margins. Free cash flow this has been estimated at $170m, putting Myriad on a FCF/EV= 10.9%

Forward PE ratio is at 22.41/.975=23x and the co has previously discussed giving cash back to shareholders. I would expect an earnings accretive acquisition in Europe by year end. The results were not blow out, but the long term picture looks good. On balance, the markdown today provides a decent buying opportunity, in my humble opinion.

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