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By Dr. Steven Murphy, Dr. Tro Kalayjian

Myriad (MYGN) is a molecular diagnostics company that focuses on the development and marketing of predictive medicine, personalized medicine, and prognostic medicine tests in the United States. Their most well-known tests include BRACAnalysis/ BART, which are tests for hereditary breast and ovarian cancer, and COLARIS, another hereditary cancer test for colon and multiple other cancer risks. Myriad is also known for a recent SCOUTS ruling, which found that Myriad did not have the exclusive right to isolate an individual's BRCA1 and BRCA2 genes. After this ruling, two competitors to Myriad, Ambry and Gene-by-Gene, announced that they would offer BRCA testing including BART analysis. Myriad responded by filing patent infringement lawsuits against both companies. More recently, on 9/10/13, while at Morgan Stanley Healthcare Conference, Myriad's management conceded that the hurdle for injunction is "set high", the stock price has moved down 6% since.

Short Thesis

This report will demonstrate that Myriad has limited IP protections, whose market-leader tests will continue to be challenged by competitors. Further, governmental initiatives will continue to erode the potential for DNA based IP. We will also outline how the company's strategic objectives with the release of MyRisk, appear to be mere brand-extension and likely cannibalistic. We will discuss how the insurance environment for payment and test distribution is moving towards a hostile stance against non-geneticist ordering, which we believe will significantly alter the competitive landscape in favor of Myriad competitors. These issues, in our opinion, create a perfect storm to erode Myriad's profits, and thus, share price. With the current stated business model and ensuing medical-legal landscape, we believe that in a 1 to 3 year time-frame, Myriad will have cataclysmic decreases in revenue.

Recent policy decisions by payors will greatly impact revenues

Effective September 15th 2013, Cigna (CI) has decided that they will not pay for any BRACAnalysis tests unless ordered by a board certified geneticist. Per Cigna, "recommendation for testing is confirmed by an independent specialty-trained genetics professional such as a medical geneticist or a genetic counselor who is an American Board of Medical Genetics or American Board of Genetic Counseling certified genetic counseling professional who is unaffiliated with a genetic testing lab." Cigna is a global health service and insurance provider that serves approximately 14 million. This policy update will now force patients to seek genetic counselors, before getting BRACAnalysis or 2 other specialty genetic tests. Currently, Myriad is telling all non-geneticist physicians who order testing to refer Cigna patients to geneticists and genetic counselors. This will create a bottleneck. In the US, there are only 2700 certified genetic counselors, and 1400 board certified Geneticists, with nearly three fourths working in hospitals, and nearly half working in large academic centers. Investors need to understand that this move from Cigna will force patients to academic institutions, the very institutions which were plaintiffs in the SCOTUS case. Already, several academic centers have announced plans to start BRCA testing in-house.

Currently Myriad has a significant women's health division which accounts for approximately 40% of sales. Unfortunately, these sales come through physicians who are not board certified geneticists or counselors. Third party payers like Cigna will not pay for BRCA tests ordered by non-geneticist physicians. Instead these patients will be referred to geneticists and genetic counselors, the majority of which work at large institutions who, now post-SCOTUS decision, are offering inexpensive alternatives to Myriad's BRACAnalysis. We expect other insurance providers to follow suit, and although this will likely bottleneck this specialized testing equally, it preferentially deters patients away from Myriad-aligned private physicians to Myriad's SCOTUS-approved competitors, academia. Overall, we view the current and future insurance landscape to be increasingly hostile to the price premium defended by Myriad.

Cigna's policy decision, which will go into effect in September 15th of 2013, serves as a model for other providers with much larger client bases. We believe that the SCOTUS hearing and these new insurance policy changes are the perfect storm that will drive patients to academic centers, who will likely offer similar tests at a fraction of the cost to patients when compared to Myriad's BRACAnalysis. To our knowledge, Myriad's estimates do not account for this loss of revenue.

Brand Loyalty, not enough …

We concede that Myriad does have significant leads in branding, which may represent a barrier to competition. This brand awareness was noted in recent increases in revenues due to celebrity announcements such as Angelina Jolie's. In addition, there are technical know how barriers to entry by other clinical labs. Most notably, Myriad's proprietary database, required to interpret uncertain genetic results. This barrier and strategic advantage is significant enough that Myriad argued in court that no other company should be allowed to do BRCA testing due to the significant potential harm caused by not using its private database. We believe this to be a false argument, especially given the highly skilled scientists and physicians in academia performing BRCA testing.

Our discussions with several key stakeholders, including support from Senator Patrick Leahy, indicate that government representatives are urging the NIH and its director, Geneticist Francis Collins MD PhD, to develop its own robust variant database over the next 2 years. Of note a public database already exists, which has thousand of entries, and if developed represents a significant disadvantage for Myriad, as the public database would destroy any value in Myriad's proprietary one.

Without the advantage of a proprietary database, we believe that physicians will have no impetus to use Myriad's premium product. We agree with a recent JP Morgan analysis, which demonstrated that nearly all physicians would be willing to use another lab if costs were cheaper.

More competitors means price erosion

Within one day of the SCOTUS hearing, two major competitors announced immediate available for BRCA testing. Already, several Academic centers have begun to offer the testing as well. Earlier this month, Quest Diagnostics (DGX) confirmed that they will continue with their plan announced in June of this year, to make BRCA testing available. Our contacts at LabCorp express similar sentiment. With economies of scale, and increasing competitors, we feel that prices will continue to drastically fall. Ambry, and Gene-by-Gene offered BRCA testing at roughly, $2,000 per test, while Myriad's tests costs about $4,500. We believe with next generation sequencers and the aforementioned competitive landscape prices will be closer to $1,000 in 2015. This deep discount is not adequately reflected in Myriad's financial guidance.

No Market for Novel Testing Services

It appears that one of Myriad's strategies, in the face of wide-spread competition, will be to extend their brand and product through MyRisk. This is a novel genetic test that Myriad hopes to use as a transition away from BRCA. Our contacts at Myriad note that Myriad is currently releasing this testing only to a small number of providers, with a slated full release in 2014. Furthermore, it is unclear who exactly will pay for MyRisk. Currently, MyRisk is not contracted nor guaranteed payment by any insurance providers that we are aware of. This was confirmed in discussion with clinical representatives at Myriad. We also note that MyRisk is not part of any practice guideline from any professional society.

We remind investors that on initial launch of BRACAnalysis, physicians were reluctant to order testing. As stated in their lawsuit against Ambry, it cost $500 million to develop, distribute and market the BRACAnalysis test. This new test, MyRisk will have to face the same issues with acceptance, with the added issues of an unfriendly competitive landscape with multiple inexpensive BRCA testing available to the very physicians that Myriad and other labs will be detailing. Overall, we believe that the launch of MyRisk as a brand-extender is a forced move that is inherently not ideal.

Silver Lining

We note that some areas of Myriad demonstrate nominal improvement. In a recent conference call, Myriad's management indicated that BART testing had some upside. We note that BART rearrangement testing will continue to grow if MyRisk will be paid by insurers. Also, COLARIS testing continues see 15% growth. We believe COLARIS testing will continue to be bolstered as the Lynch Syndrome Screening Network has begun to encourage universal screening for colorectal tumors. This will increase identification of Lynch syndrome candidates that will need to be confirmed by Colaris testing. We would like to point out, though, that there are alternatives to Colaris. Approximately 50 labs including many academic centers and commercial labs such as Quest are already offering Lynch Syndrome testing.

Overall Sentiment

Despite minor successes with BART testing, and COLARIS, we have not been impressed with Myriad's publicly stated strategic plans. BRACAnalysis represents 75% of their annual revenue, and will be severely challenged over the next several years. We feel that the reimbursement landscape is shifting in favor of Myriad's competitors. Furthermore, we expect that the competitive landscape will drastically evolve and the number of competitors to Myriad in the genetic testing market will likely increase, and cause significant price erosion. Furthermore we feel that MyRisk is a poorly differentiated product, that will lead to significant cannibalism from its current at-risk BRACAnalysis franchise. We caution investors to consider the risks. Your risks are MyRisks.

Source: To Myriad Investors, Your Risks Are MyRisks