Don't Short Myriad Genetics Ahead Of Earnings

| About: Myriad Genetics, (MYGN)

Previously, I laid out the bear case for Myriad Genetics (NASDAQ:MYGN) and discussed the reasons why the stock was so volatile following the Supreme Court decision on June 13th of this year. The bear case is based on the premise that Myriad is facing competition for the first time now that its most important patent has been invalidated by the Supreme Court. I believe that long-term, the bear case is still valid. Eventually, I think Myriad will lose market share and will have to cut its prices to stay competitive. Loss of market share and shrinking margins will have a very negative impact on earnings in the future if Myriad has to face competition. However, in the short term, it might pay off to be bullish for a little while.

Following the Supreme Court decision and the immediate announcement of competing tests from Ambry Genetics and Gene by Gene, Myriad's stock was in free-fall for a little over a week, falling as low as $25.00 on June 24th. However, not everyone believes that Myriad will lose market share. The stock started to recover the losses in the absence of any new announcements of competing tests.

I said previously that I thought more companies would announce competing tests as well, but I have been wrong on this point so far. For now, BRCA1 and BRCA2 testing is being offered by Myriad, Ambry, and Gene By Gene. Myriad is now using litigation to try to block Ambry and Gene By Gene from offering their competing tests. The announcement of Myriad's lawsuits on July 9th and 10th helped to fuel and extend the recovery in Myriad's stock price. In addition to the latest lawsuit against Ambry, Myriad also asked for an injunction to block Ambry from continuing to test while the lawsuit is ongoing.

It has now been over a month since the lawsuits were filed and the courts have neither granted nor denied Myriad's request for an injunction. Given the fact that the Supreme Court recently ruled that the BRCA1 and BRCA2 genes themselves were not patentable, I think that the court will deny Myriad's request for an injunction while the case is ongoing. Granting such an injunction would essentially reverse the Supreme Court's ruling by not allowing Ambry to use methods that do not involve the use of cDNA to test for naturally occurring pathogenic variants in BRCA1 and BRCA2. Unfortunately, nobody knows when the judge will announce a decision on the injunction.

What we do know is that Myriad will release earnings after the bell on Tuesday afternoon. The Supreme Court decision was not made until June 13th and the quarter that Myriad will be reporting on ended June 30th, so earnings won't yet be impacted by competition. In fact, earnings may actually get a boost from Angelina Jolie's public announcement that she carries a pathogenic mutation and underwent a double mastectomy as a result.

Myriad has been a battleground stock with lots of publicity around the Supreme Court decision, and it's been very volatile as a result, reacting even to small news items. The earnings that will be reported on August 13th won't be able to give any real insight into how competition may be affecting Myriad's sales. However, there will be plenty of investors, even those of the professional type that will make the assumption that if earnings are good, then competition is not a problem for Myriad.

I do think that Myriad will report good earnings, so I do not advise being short the stock when earnings are announced. If you are a short term trader, this could be a good opportunity to buy ahead of earnings and sell on Wednesday or Thursday after the stock reacts to earnings, but I would not stay in the stock long-term. In fact, if the stock does go higher after earnings, I'd recommend buying puts against the stock. After earnings, the time premium in options will decrease and make both puts and calls cheaper compared to the stock price. If you think that the judge will deny Myriad's injunction request, buying puts after earnings is the way to go.

Myriad is now a news-driven stock with lots of debate about whether it can maintain its current earnings growth. This is not a "buy and hold" type of stock any longer. If you're a trader who likes volatility and you want to make a directional bet on the next news item, this stock will likely give you lots of opportunities over the next year as litigation over the genetic testing market for BRCA1 and BRCA2 plays out. Earnings should be a positive for Myriad this week, so cover your shorts or get long before earnings. However, if the stock goes up after earnings, it will be a good set-up to take a short position in anticipation of negative news after earnings for Myriad.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MYGN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.