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MYGN - Myriad Genetics


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Honestly if you want to know more about it read the VIC write up, that is where I got the idea.  They do genetic preventive testing for cancer and doing that for a big premium over the competition. There is a lawsuit ongoing that is claiming their patents arent valid which is why the stock is in a bit of a slump. The interesting thing is that this is a stock that is heavily shorted because the shorts think this company doesnt have an edge when their patents are going away. This is a new area that is growing alot in the last few years, and its pretty high tech. So if your not into that read no further.

 

The thing is that competition, when they do a test, about 10-15% of the time it is inconclusive.

When someone gets tested for BRCA 1/2, there are 4 answers one will get from the test. It can be that one does not have a genetic mutation, one has a benign mutation, one has a deleterious mutation or one has a variant of unknown significance (VUS). The more comprehensive the database, the greater the likelihood one will get a definitive answer regarding the classification of that genetic mutation.

And Myriad has by far the largest database because they ahve been doing this since the early 90's.

However, this statement is very misleading. First, if you look at what Myriad’s VUS rate was back in 2004 (up to the point where it had contributed to the public database), its VUS rate was ~12%. But keep in mind that its database included both deleterious AND benign mutations that the public databases do NOT have. Myriad didn’t reach a 4%-5% VUS rate until 2008/2009 and had cumulatively tested ~500k patients at that point or an incremental ~350k from 2004. Thus it is practically impossible for Ambry to have this VUS rate.

They also get the tests back twice as fast (which is a big edge in a small% of cases) and offer superior customer support service.

 

Currently their Bracanalysis which tests for ovarian consists 85% of revenue. Their market cap is 1.8 billion, and if their database does indeed give a ncie edge, then they are set up to capture a huge genetic testing market for other cancers which is tens of billions of dollars. Several of those products have already been launched in the last few months. And they are also set up to start capturing alot of revenue in EUrope. If you read their lastest Q call, management is pretty excited about that. If you look at the numbers they generate nice growing revenues with high margins.

 

The reason this growth stock trades so low is because of some uncertainty's . The market thinks their lower VUS rate doesnt give em a big enough edge to compete. Note that they havent lost their patent suit yet, but alot of experts seem to think its unlikely they win it. If they do happen to win it they basicly have a monopoly untill 2018.

 

BUT if they dont win it, their database and superior service should give them an edge to compete. But here is where I am having some doubts. If you had to use one or the other, then if the insurance companies are rational they will obviously go with Myriad, because the higher VUS rate is more expensive. But what if they can simply have Ambry do 85% of the test, and 15% of the time when it is inconclusive they go to Myriad?

 

Reason price is so depressed currently is also because of a clerical error. Funding for these tests was suposed to be slashed by 48%. To me it seems likely this is a clerical error. If the company says it,  but above all, why would they cut costs without communicating below the entire market price for this? Even their cheaper competitor Ambry is 30% cheaper and not 48%. And betting on government incompetence seems like a safe bet here.

 

At its current price, a 30% price decline to competition's levels seems priced in, so that is why this seems interesting. Very assymetrical risk return with a quick catalyst. They have a ton of new products in the pipeline, and with its growth ahead an arguable edge (which also helps with the new tests), they should have at least a PE of 15-16. Which it will reach quickly once all the shorts have to cover.

 

As a final note, they buy back alto of stock.

 

THought id post it here, because I cannot discuss it on VIC. Its pretty high tech, but an interesting situation none the less.

 

Edit: Ok I got something wrong, there was a clerical error earlier this year, which was corrected. They confirmed this in an 8k.

http://www.sec.gov/Archives/edgar/data/899923/000119312513385525/d605110d8k.htm

But apparantly this happened again, and again the company claimed this was another clerical error. Really strange.

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I don`t touch heavily shorted stocks, statistically heavy shorted stocks underperform the market by >4%.

 

Currently their Bracanalysis which tests for ovarian consists 85% of revenue. Their market cap is 1.8 billion, and if their database does indeed give a ncie edge, then they are set up to capture a huge genetic testing market for other cancers which is tens of billions of dollars. Several of those products have already been launched in the last few months. And they are also set up to start capturing alot of revenue in EUrope. If you read their lastest Q call, management is pretty excited about that. If you look at the numbers they generate nice growing revenues with high margins.

 

Its possible that they loose the pricing power of their main horse, thats a big red flag. But its totally possible that i am wrong here and this thing gets a big fat short squeeze.

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I've spent some time to Myriad and though I haven't read the VIC writeup, I cannot help but think it's incomplete. First a little background that intrigued me. One of the founders of Myriad is a guy named Walter Gilbert. He also was a founder at Biogen-Idec and is a Nobel prize winner in Chemistry. He was the CEO of Biogen in the early days, and the leading researcher. Biogen had some great technological promise, but was miserable on the business side. B/c of these business failures, Gilbert got pushed out, and I get the sense that in his eyes, his "baby" was taken from him before he ever got the chance to see it to maturity. Biogen's success was a huge dagger in Gilbert's side. In founding Myriad, Gilbert was trying to both advance science and also prove his mettle as an actual businessman. I went into researching Myriad intrigued by the area its working in, and its founder's DNA so-to-speak.

 

Myriad's case went to the Supreme Court already, where they had what at best can be called a "split decision" though in reality, they lost the key part of the case.  Here is a link that has a summary of major news coverage of the Supreme Court's opinion http://www.scotusblog.com/2013/06/evening-round-up-myriad-genetics/#more-165016 which includes a link to the opinion itself. It was written by Clarence Thomas (which for you non-Court watchers out there, is a rarity, as even when he agrees with the opinion, he usually writes a concurring opinion). Here is one of the powerful quotes from Thomas that effectively summarizes the decision:

 

“Myriad did not create anything,” Justice Clarence Thomas wrote in the decision. “It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes. Groundbreaking, innovative or even brilliant discovery does not by itself satisfy the criteria (for a patent)"

 

Where Myriad won was in the upholding of their patents on cDNA, which is important, though not necessarily pivotal. Within hours of the ruling, Myriad's competition grew to some heavy hitters, far more capitalized and with much larger networks than Ambry. Quest Diagnostics was the first big hitter to enter the fray, offering the test for $2,500 or 40% less than Myriad http://www.questdiagnostics.com/home/physicians/testing-services/by-test-name/BRCAvantage . This test specifically cuts at what accounts for 1/3rd of Myriad's revenue. It will be very hard for this to be a growth stock in light of that (http://www.forbes.com/sites/matthewherper/2013/10/15/quest-diagnostics-to-offer-cheaper-version-of-myriads-breast-cancer-gene-tests/). There is a corollary problem for Myriad in that I think it's safe to assume they were able to sell more than just BRCA in each testing instance considering they a) had the monopoly on the more important BRCA test and b) many operate under assumption of "if I'm going to do one test, I might as well do them all at once." It's impossible to know exactly how much of the other $1.2 billion in revenues won't take a hit b/c Myriad now will not be the go-to for BRCA. But, even assuming none of that $1.2 billion is touched and Myriad then matches Quest's price on BRCA, it would lead to an 18% shortfall in revenues to last year and would require the remainder of the business to grow at 20% just to break even.

 

Quest is one of the two largest diagnostic testing companies in the US, has a national presence and is the trusted, reliable go-to for many doctors. The other major diagnostic co is LabCorp, who earlier this month announced their own BRCA test http://www.marketwatch.com/story/labcorp-to-offer-brcassuresmbreast-cancer-mutation-tests-2013-12-02. In September 2010, LabCorp bought Genzyme's genetic testing unit which was highly regarded, and earned ~$370 million at the time of sale. I point this out b/c LabCorp can use the proceeds of their already profitable genetic testing business in order to invest in ramping up their offerings. These are just two of the competitors who have entered the fray already. Some well-regarded analysts expect the already reduced $2,500 pricepoint to drop even further to $500. This makes sense considering nearly every test that Quest and LabCorp do becomes commoditized and this is especially so as Medicare/Medicaid have ramped up pressure on the duopoly to further reduce pricing across the board.

 

With lower pricing and scale, LabCorp and Quest can quickly render Myriad's already built database a moot point. While it's hard to know for sure how much residual value and how much of a draw this database would be to Myriad, it seems like the bulls overstate this point.

 

As far as future possible revenue streams, the area of genetic testing has seen a rise in competition and is undergoing rapid technological change. There are companies in the process of putting together all-in-one cancer screenings (test for all known cancer genes at once), which use next generation sequencing technologies. Here is one highly regarded initiative that combines both all-in-one and next generation tech http://core-genomics.blogspot.com/2012/10/foundation-medicines-cancer-genomics.html.

 

So this sums up a good chunk of what I've uncovered and concluded about Myriad. Curious to hear any responses...I am also interested in Genomic Health, Inc (GHDX) which has been massively accumulated by Baker Brothers, the best biotech investors in the world as far as I'm concerned.

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haha damn, there is a short thesis, it gets destroyed , and now you essentially destroyed the long thesis in a different way pretty well.

 

I guess this is why buffet doesnt like tech stocks.

 

What are your thoughts on MyRisk tho?

 

And it is pretty expensive and time consuming to test. I think between 2 and 4 weeks for competition? Myriad has this down to 5-10 days. So their database should grow, adn their VUS rate goes to 1-2%. While competitions VUS rate is over 10%.

 

they have tested 1 million patients so far. Just seems to me this cannot be bridged within the next 1 or 2 years.

 

Also Quest isnt really better capitalized. Myriad holds 360 million$ in cash with almost no liabilities. They have a large sales team , and alot of medical proffessionals are already familiar with them. Quest's balance sheet is pretty leveraged, and they dont hold as much cash. So I dont think they are behind when it comes to this.

 

What are your thoughts on the 2 clerical errors so far? That seems really strange, but believable with all the government incompetence going on.

 

2. Quest is using a large rearrangement technology (MLPA) that is not approved by the FDA for clinical use in the United States and according to the manufacturer, MRC Holland, is only to be used for 'research purposes'. In fact, the MRC Holland website states: 'All SALSA MLPA kits are sold by MRC-Holland for research purposes only. Our kits are not FDA/CE certified for diagnostic purposes!'

 

3. Quest is referencing a 13% uncertain variant rate compared to Myriad's 2%, which means 11% of Quest patients will receive an uncertain test result that would have been interpreted by Myriad.

 

 

 

Read more: Myriad vs. Quest over BRCA testing: It's getting serious - FierceMedicalDevices http://www.fiercemedicaldevices.com/story/myriad-vs-quest-over-brca-testing-its-getting-serious/2013-10-16#ixzz2oJaZSnnd

Subscribe at FierceMedicalDevices

 

I guess the problem here is that bulls and bears both make good cases. I bought a small amount of stock, but i think i should have thrown this into the 'too hard' basket.

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I'm not sure about MyRisk, it's something that should be in demand in the future, though I don't know enough to judge whether Myriad would have an advantage over anyone else who is trying to accomplish the same goal. It's going to be competitive.

 

I'm not sure "expensive to test" is the right terminology there, b/c some providers are willing to accept a much lower margin than Myriad, and thus can make the test much cheaper for the patient. It is time consuming, though much of that problem can and will be solved by advances in sequencing technology. Myriad will be using Illumina's next generation system and so too is GHDX.

 

Quest has far more cash at their disposal than Myriad. Quest has 4x the CFFO/year and 4x the market cap, as does LabCorp. Being first-mover, as Myriad is, is an advantage for many reasons though it's hard to quantify exactly how much.

 

I also would not underestimate the negative sentiment associated with Myriad's aggressive litigation to preserve their patent(s). They are accused of "trying to patent nature" and a lot of rhetoric has to be damaging to the company's reputation. I would also guess that people are far more sensitive to price than speed with such testing, considering this is a preemptive diagnostic rather than a diagnosis.

 

I have no clue about the so-called "clerical errors." It is a huge leap of faith to assume government incompetence, when it is well known that the gov't is pushing aggressively for lower costs in medicine, particularly w/r/t diagnostic testing. The response from Myriad reeks of trying to play into a popular meme. As you say, it is "really strange" and I would be more inclined to think skeptically about the company's motives than the government's competence (or lack thereof).

 

It's certainly possible that things end up going alright for Myriad from here. I don't know. I just don't feel very confident that this is an investment with manageable downside risk. Just my humble opinion. I also find that in areas of technology like this, the suppliers selling the pickaxes (like the sequencers, reagents, dyes and proteins) end up the winners at the end of the day. The tests themselves almost always become commoditized sans patent protection.

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"Myriad Genetics Drops After U.S. Cuts Rate for Gene Test" http://www.bloomberg.com/news/2013-12-30/myriad-genetics-drops-after-u-s-cuts-rate-for-gene-test.html?cmpid=yhoo

 

I feel like Myriad has communicated this horribly to the market. The meme about "government incompetence" was a grasp at straws that is a particularly egregious example of trying to play into an ideological sentiment.

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