Myriad Genetics' Acquisition Of Crescendo Bioscience: A Question Of Timing

| About: Myriad Genetics, (MYGN)

Myriad Genetics (NASDAQ:MYGN), a developer of medical tests from molecular information stored in people's genes, acquired this week privately-held Crescendo Bioscience, another diagnostics maker with a widely used test for rheumatoid arthritis. At first glance, the acquisition makes a lot of sense for Myriad, adding a ready-made capability in a complementary line, but also this week, the scientific landscape changed markedly for rheumatoid arthritis and similar disorders, adding a wrinkle into Myriad's plans for the company.

The explosion of genetic information in the past 20 years, from a combination of scientific discovery and massively increasing computer power, vastly increased our knowledge of the way disease progresses in the human body, making this type of information vital for diagnosis and treatments. Myriad Genetics, based in Salt Lake City, develops tests for hereditary risks of several types of cancer: breast, ovarian, colon and colorectal, melanoma (advanced skin cancer), lung and pancreatic cancer. The company's tests also can help guide a patient's individual chemotherapy dosing and toxicity tolerance, as well as predict the aggressiveness of prostate cancer.

Investor snapshot

For its 2013 fiscal year ending on 30 June, Myriad reported a net income of $147 million on revenues of $613 million, which represent increases of 31 percent and 24 percent respectively compared to 2012. For the first half of fiscal 2014, ending 31 December 2013, the company had net income of $106 million on revenues of $407 million, indicating increases of 62 and 44 percent, respectively, over the previous year. Nearly all (96%) of its revenues of $204 million in the most recent quarter came from molecular diagnostics, especially breast cancer tests, which accounted for $141 million.

Over the past 52 weeks, Myriad's share price ranged from $20.02 to $38.27 a share. Since 30 December 2013, the company's share price rose steadily from $20.79 that day to its close on 7 February 2014 at $32.23.

Myriad was the defendant in an important Supreme Court case testing the company's patent claim on genetic material. In its June 2013 decision, the court ruled unanimously - itself a rare happening - that naturally-occurring DNA is not eligible for patent protection, but synthesized genetic material can be patented. Seeking Alpha contributor (and organic chemist) Derek Lowe tells more about the case.

A good fit

Myriad Genetics is paying $270 million in cash for Crescendo Bioscience, which includes repayment of a $25 million loan. Crescendo, in South San Francisco, California, makes diagnostics for rheumatoid arthritis, an autoimmune disease affecting some 1.3 million people in the U.S., and is expected to continue operating under its name as a subsidiary of Myriad.

In autoimmune disorders, the body's immune system mistakenly interprets healthy tissue as an invading antigen, triggering white blood cells to release antibodies against those healthy cells. An individual's genetic composition can make a person more susceptible to autoimmune diseases. With rheumatoid arthritis, the mistaken immune reaction affects tissue around the joints, causing inflammation and pain, particularly in the wrists, fingers, knees, feet and ankles. The disease affects women at about twice the rate as men, with the risk of the disease increasing as one gets older. Lupus and multiple sclerosis are other examples of autoimmune disorders.

Crescendo's lead product is Vectra DA, a test for rheumatoid arthritis that assesses the presence of 12 key proteins in a sample of the patient's blood. The company says the complex nature of the disease requires testing for a number of biomarkers, not just a single variable. Patients' blood samples are tested in Crescendo's lab, where the results are aggregated into a composite score, then translated into a low, moderate, or high level of disease activity. Testing for disease activity at various intervals, says the company, makes it possible to track its progression and for clinicians to prescribe more individualized treatments.

During the quarter ending on 31 December, Crescendo reported processing some 27,000 Vectra DA patient blood samples. In July 2013, the test became eligible for Medicare reimbursement.

Myriad says the acquisition will bolster its presence in the autoimmune testing market. In addition, says Myriad, the Vectra DA test will fit into plans for expanding the company's RBM (for rule-based medicine) platform that tests for multiple proteins in small blood samples. Myriad RBM also operates as a subsidiary in Austin, Texas, Saranac Lake, New York, and Reutlingen, Germany.

Changing landscape for autoimmune research

Myriad Genetics and Crescendo Bioscience announced the merger on 4 February 2014, but on the day before, National Institutes of Health and 10 leading pharmaceutical and biotechnology companies announced the Accelerating Medicines Partnership, an initiative to find new biological targets for a range of serious diseases, and speed-up development of drugs and diagnostics. The five-year, $230 million program plans to investigate genetic and molecular indicators for Alzheimer's disease, type 2 diabetes and the autoimmune disorders rheumatoid arthritis and lupus.

While most of the initiative's funding ($130 million) is devoted to work on Alzheimer's disease, $42 million is spent on autoimmune disorders, with the remaining with $58 million going to type 2 diabetes. Of the total funding, $119 million is contributed by NIH, while industry is providing $111 million. A key part of the collaboration, says NIH, is the agreement by participants to make immediately available data and analysis generated by the Accelerating Medicines Partnership to the broader biomedical community.

For rheumatoid arthritis and lupus, the initiative plans to analyze tissue and blood specimens from people with these diseases, to identify changes in biology at the level of single cells, and provide better insights into the process behind the disease. The project also plans to develop computational tools that integrate different data types to identify promising molecular pathways.

While the Accelerating Medicines Partnership does not pose an immediate threat to Myriad-Crescendo's testing business for rheumatoid arthritis, companies in the collaboration are most likely making plans for entering this market based on the findings they generate. The question for Myriad Genetics is how to respond. Joining the Accelerating Medicines Partnership could open lucrative opportunities for Myriad to collaborate with pharma and biotech companies developing treatments for autoimmune disorders.

But that step would require signing on to the partnership's policy of opening its research to the larger biomedical community and abandoning the company's history of closely protecting its discoveries, a history that already landed the company in legal textbooks as well as medical journals.

For Myriad Genetics, the risk of ignoring the Accelerating Medicines Partnership and going it alone could leave the company and its investors over the long term with a technically sound product, but one that does not mesh with the rest of the industry. For example, the protein biomarkers used in Crescendo's proprietary test for rheumatoid arthritis may not match up with biomarkers eventually uncovered in the NIH partnership, and made freely available to the biomedical community at large.

Larger scientific and business trends are pushing for more, not less, integration and transparency in healthcare. In 2011, the Institute of Medicine, part of the National Academies, published its roadmap for precision medicine that integrates molecular causes of disease with genomics and standardized electronic health records to generate more individualized diagnostics and treatments. At the same time, payers of health care in the U.S. - e.g., insurance companies and Medicare - spurred in part by the Affordable Care Act are emphasizing more (not less) integration with other parts of the complex healthcare world to improve delivery of services and reduce costs.

If Myriad follows its current route with proprietary diagnostics for rheumatoid arthritis, it could well be at a disadvantage when marketing its services to healthcare providers eager to be part of the larger industry that uses more open and integrated methods. Going forward, Myriad will need to explain to investors its strategy for being a player in the larger healthcare picture, and not a spectator.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.