Tuesday, January 20, 2009

Myriad Genetics (MYGN) - Another Diagnostic Heavy Hitter

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Along with Sequenom (SQNM), another name I've been watching for quite a while in the healthcare diagnostic area is Myriad Genetics (MYGN). Both were mentioned in a blog entry from August 2008 [Aug 25: Sequenom Flying off a Positive Investor's Business Daily Mention] Their niche is cancer diagnostics; full website here. The stock had a standout 2008, among the top perfomers with a 40% gain [Dec 28: Best Performing Stocks of 2008] and continues to have a promising road ahead.

First some history, Myriad Genetics had been part biotech company and part diagostic company. As a general rule I stay away from biotech companies aside from a few of the larger more established name because rule #1 of making money is not to lose money. And biotech companies carry the risk of waking up any morning and seeing a 50%+ loss based on a FDA decision, drug failure, etc.

At the end of June 2008, Myriad said it will stop development of its Alzheimer drug, Flurizan due to a failure of a phase 3 study.
  • The Flurizan study, which enrolled patients with mild to moderate Alzheimer's, did not achieve statistical significance on either of its two primary endpoints -- cognition or activities of daily living, the company said. While disappointing, the negative outcome from the Flurizan study was not unexpected, given the relatively poor results coming out of the drug's phase II study. In fact, many investors are likely to welcome Flurizan's demise because shelving the drug will reduce Myriad's expenses and boost profits from the company's genetics testing business.
  • "The discontinuation of Flurizan will reduce our pharmaceutical development spend substantially and should enable Myriad to achieve profitability next year," said CEO Peter Meldrum, referring to the fiscal year ending June 30, 2009.
The stock suffered a bit on the news, but quickly reversed and took off to the races - jumping from $45 to $67 in the month of July 2008. (in a related note, Myriad was paid $100M for the right to market Flurizan in Europe by Danish firm Lundbeck just 6 weeks before the announced the test failure. It was non refundable. Ouch! American capitalists win again)

At that point, the company had some drugs at earlier stages of testing plus a package of 5 diagnostic tests. (it has since added a 6th) In October 2008, the company announced a decision to split the company into two
  • Biotechnology company Myriad Genetics Inc. said Monday it will split into two public companies to create better growth opportunities for its research and drug development business and its molecular diagnostics business.
  • The research and drug development business will operate under Myriad Pharmaceuticals Inc., while its molecular diagnostics business will operate under the name Myriad Genetics Inc.
  • The company expects the spinoff will be completed as a possibly tax-free, prorata dividend distribution to shareholders of Myriad Genetics Inc.
  • More information on the spinoff will be available in a Securities and Exchange Commission filing expected to be filed in the second quarter of next year.
  • After the spinoff, Myriad Genetics (MGX) Inc. will have 800 employees and five marketed products. It will focus on predictive and personalized medicine. Myriad Pharmaceuticals (MYGN) Inc. will have 200 employees and will research and develop cancer and infectious disease drugs. It currently has four drug candidates in human clinical trials.
So to get at the part we eventually want - MGX will be the symbol - you still have to own MYGN. Then a tax free spin should ensue by middle of this year.

Here are some snippets from the last earnings report from November 4th (the next earnings report is in early Feb)
  • Myriad Genetics, Inc. (NASDAQ: MYGN) today reported its first profitable quarter from operations. The Company recorded a net profit of $14.5 million, or $0.32 basic earnings per share ($0.30 diluted earnings per share), compared to a net loss of $8.0 million and loss per share of $0.18 in the same quarter of the prior year.
  • For the three-month period ended September 30, 2008, total revenues increased to $73.6 million from $48.3 million in the same three months in 2007, an increase of 53%. This growth resulted primarily from an increase in molecular diagnostic revenues, which were $70.0 million this quarter, compared to $46.1 million in the same quarter of the prior year. This 52% product revenue growth resulted from increased sample flow and strong customer demand across all five of Myriad's molecular diagnostic products.
  • A major contributor to the Company's profitable quarter was its molecular diagnostics business, which achieved a net operating margin of 46%, a significant improvement over the 40% net operating margin for the same three-month period in 2007.
  • Gross profit margins from sales of molecular diagnostic products were 86% in the first fiscal quarter of 2009, as compared to 84% for the same period last year. Management believes that these gross profit margins are sustainable and that there is further room for improvement as the Company adopts more efficient operating systems.
  • As of September 30, 2008, the Company remains in strong financial condition, with approximately $443 million in cash, cash equivalents and marketable investment securities. The Company has no debt or convertible securities.
So you have a company with 86%! gross margins (which can be sustained or improved upon), no debt, growing like a weed, and now profitable. That won't come cheap. Myriad has an atypical year end of June 30th, so its "year end" 2009 analyst estimate is not Dec 31st, but June 30th, 2009. It comes in at $1.43 - so at a price of $70 this is a forward PE at just under 50 - so if deep value investing is your thing, Myriad is not for you.

Let's look at the chart and why might be a particulary interesting time to get involved.

After the above mentioned abandonment of Flurizan, the stock had a huge surge in July. Since then it has been consolidating that move, and if you exclude the "panic sell" off period during "carnage season" (this fall) you see a range of $57 to $70. Why am I excluding the heavy selloff period in October? Because this had a lot more to do with the market and an era of "sell at all costs, I just want out of the market" - than anything to do with the company or what its actual trajectory would be in a less fearful market.

So we have half a year of consolidation and the "longer the sideways action, the larger the eventual move". After the last earnings report the stock surged to $72s... it did again on the "hey it's 2009 - all the world's problems go away since it is not longer 2008" rally we enjoyed. But Friday the stock pushed (potentially) over that line in the sand to the topside. If that is indeed what is happening we have a breakout over a "double top" which would be considered bullish. Hence why I am writing a newer update on the name.

The company also was mentioned in a piece in Investor's Business Daily this past week but unlike the August story, this one is focused solely on them.
  • Breast cancer is the most common type of cancer among women in the U.S. other than skin cancer. Each year, more than 180,000 American women learn they have this disease. The American Cancer Society estimates that over 40,000 women die each year from breast cancer. That makes it the second biggest killer behind lung cancer among women. Ovarian cancer is less common, but still deadly. Of the 21,650 new cases of ovarian cancer found in women, 15,520 die every year.
  • Myriad Genetics (NasdaqGS:MYGN - News) is the leader in the relatively new field of cancer predisposition testing. It has six tests on the market that tell patients whether their genes make them more likely that they'll get various types of cancer.
  • The Salt Lake City-based biotech company's most popular and biggest selling product is its BRACAnalysis, which stands for Be Ready Against Cancer. It is a simple blood test that detects mutations in the BRCA1 and BRCA2 genes. The test can also show how best to treat the disease. Women who take the BRACAnalysis and test positive have an 82% chance of developing breast cancer in their lifetime and a 54% risk for ovarian cancer, the company says.
  • Myriad's BRACAnalysis is priced at $3,120 per test, but it is reimbursed 96% of the time with an average out-of-pocket expense averaging only $54, says Piper Jaffray analyst Edward Tenthoff. "Some say diagnostic testing is a discretionary item," Tenthoff said. "The test has a low out-of-pocket expense, and that's why we think the economic slowdown will not have as big an impact on Myriad."
  • One of the biggest challenges facing Myriad, aside from health care costs and the economic crisis, is trying to get the word out about its diagnostic tests to patients and physicians, especially obstetricians, gynecologists and oncologists. Myriad's BRACAnalysis is used by roughly 10% of OB/GYNs practicing today, which translates into a roughly $30 million to $40 million business, according to Michael Yee, an analyst at RBC Capital Markets. There is a $300-million-plus opportunity if all physicians are reached, he estimates. "Despite having been on the market for 10-plus years, the BRAC is still in the early innings," Yee said. "There is still plenty of room to grow."
  • Its molecular diagnostic business accounts for 95% of Myriad's total sales. The BRAC test is by far its biggest seller, generating roughly 75% of the diagnostic revenue. The other tests include Colaris and Colaris AP for colon cancer in men and uterine cancer in women, Melaris for melanoma and Theraguide FU for chemotherapy toxicity.
  • Myriad just launched its sixth test, Prezeon, in December, which can determine if a patient is producing the PTEN protein properly.
  • Myriad Pharmaceuticals has two promising drugs still in clinical trials: Azixa for brain cancer and Vivecon for HIV. Despite a decrease in R&D spending, the business burns through cash, Tenthoff says. "The pharmaceutical business has just been an albatross around the company's neck," he said. "After the failure of its Alzheimer's drug last summer, investors pressured Myriad to split the two businesses." Myriad Pharmaceuticals will be seeded with $200 million in cash (after the split), which should be sufficient to fund four years of operations, and advance Azixa and Vivecon through pivotal studies, Tenthoff says.
No position


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