Myriad Genetics (MYGN) has been a Magic Formula stock for a while, and it keeps showing up in one of my Zack's screens (high current ratio, low P/E, trading near 52-week low), but I've always ignored it. I vaguely knew that they lost a patent case recently, so I figured the "bargain" the screens were turning up was bogus. For whatever reason, I finally decided to take a look last week, and I'm glad I did.
First, the boilerplate description of the business:
Myriad Genetics, Inc. is a healthcare company focused on the development and marketing of molecular diagnostic products. The Company is focused on providing physicians with information that guide the healthcare management of their patients to prevent disease, delay the onset of disease, or catch the disease at an earlier stage when it is treatable. As of June 30, 2009, the Company launched seven commercial molecular diagnostic products, including four predictive medicine and three personalized medicine products. It markets the products through its 300-person sales force in the United States.
The product that generates "the majority" of their revenues (management doesn't break out revenues by product) is BRACAnalysis, a test for mutations in the genes BRCA1 and BRCA2. Mutations in either of these genes drastically increases a woman's chances of developing breast and ovarian cancers. The results of the test allow for better treatment of women with breast or ovarian cancers since mutated and normal BRCA tumors respond differently to different treatments.
Let's look at the bargain-like metrics that made MYGN turn up in the screens. At the current price of $15.41, MYGN has a market cap of $1.51 billion. Looking at the balance sheet, they have $451 million in current assets, most of which is cash and cash equivalents, and $22 million in total liabilities. Looking further, they have another $112 million in long-term investments. Their filings don't detail exactly what those holdings are (except for mentioning a $2 million bond they wrote off when Lehman (LEHMQ.PK) filed for bankruptcy), but what they suggest is that they're relatively conservative, liquid, income securities.
As you will see below, MYGN generates more than enough cash from operations to fund and grow its business, while returning significant cash to shareholders. So let's subtract the approximately $540 million of net liquid assets from the $1.51 billion market cap to get an enterprise value of just under $1 billion.
Now let's compare that $1 billion enterprise value to MYGN's anticipated $128 million in GAAP earnings for fiscal 2010 (ending today). That's nearly 13% earnings yield against enterprise value (EV/earnings of 7.8) and 8.5% against the full $1.5 billion market cap (P/E of 11.8). This puts MYGN well into value stock territory, so let's consider the factors that have brought Myriad to this humble but attractive condition. There are three that I've been able to find.
1) Stocks in general have been weak lately, and Myriad has fallen with the market. There's not much to say about this one. Weak markets might continue to weigh on Myriad, but a recently announced $100 million stock buyback plan should help.
2) Revenue growth has slowed from 53% growth in 2008 and 47% in 2009 to an expected revenue growth of 11% in 2010 (ending today). Also, there has been persistent concern that Myriad's largest-selling product, BRACAnalysis, maybe be approaching market saturation. This Barron's article from a year ago shows that these concerns are nothing new. In the year since, MYGN's revenues grew 11% and their earnings grew 54%, while the stock price dropped about 40%.
While there are valid concerns that sales of BRACAnalysis may not grow as briskly in the future, management has a number of arguments for why they expect growth to continue: While medical guidelines recommend 1/3 of newly diagnosed breast and ovarian cancer patients should be tested for BRCA mutations, only 17% are tested. And of the US female population, they estimate that only about 5% of the BRCA mutation patients have been found.
They are growing their sales Ob/Gyn sales force to encourage preventative testing. While the oncology market is only growing around 4% annually, Ob/Gyn sales are growing roughly 20% per year. Finally, BRACAnalysis is currently not available in Europe, and Myriad is developing plans to launch the test there by 2012.
Among their other tests, all are cancer-related, and sales are low but growing. It should be noted that it took BRACAnalysis roughly a decade to reach $100 million in sales. With an established oncology sales force, the newer products should reach critical mass more quickly, but it is still a slow process to establish most of these diagnostic tests. The two that management is most enthusiastic about are Prezeon and On-Dose. Prezeon is a test for mutations in PTEN, a gene extremely commonly mutated in a variety of cancers. There are several major classes of drugs in development that work on the PTEN signalling pathway.
As these drugs reach the market, Myriad believes that Prezeon could be an even larger product than BRACAnalysis. With On-Dose, management estimates the market at only ~$400 million, but they (and I) expect it to grow to that level relatively quickly (Remember, $400 million would more than double their revenues.)
On-Dose is used to improve 5-FU cancer therapy, which is already the standard of care for numerous cancers. In a clinical trial, On-Dose was shown to increase patient survival on 5-FU thereapy by approximately 6 months relative to standard 5-FU treatment with 50% fewer severe side effects. These results are superior to the drug Avastin (commonly combined with 5-FU treatment), which costs as much as $100,000 per year. On-Dose costs an average of $2400 per patient, hence the likelihood of quick adoption.
3) It has been widely reported that Myriad's patents covering BRCA gene testing have been thrown out by the courts. Due to its patent protection, Myriad has a near monopoly on the US BRCA testing market, and if its patents had been overturned, this would be a very worrisome development for the company.
However, Myriad management describes the situation more fully. They have 23 patents covering BRACAnalysis. The ACLU sued to invalidate 15 claims in 7 of those patents, and those claims were thrown out in a summary judgement. But those patents have 164 claims that were not thrown out, so they stand with most of their claims intact. And 16 of Myriad's BRACAnalysis patents were not involved in the patent litigation -- they also still stand.
Furthermore, Myriad plans to appeal the judgement to the federal circuit court. The judge who ruled against Myriad has ruled on patent issues four other times in his career. In all four cases his rulings were overturned on appeal. Finally, a recent supreme court ruling has likely made Myriad's position stronger for its upcoming appeal.
It is worth considering that Myriad was not sued by a commercial competitor but by the American Civil Liberties Union. The ACLU's objective is not to open up competition in the BRCA gene testing market. They are simply trying to disallow the patenting of human genes, a position I tend to favor myself. But even without a patent on the BRCA genes, Myriad's patents on the tests should protect their business.
In summary, Myriad has one large, profitable, growing product on the market and seven newer products just beginning to grow. They expect another test to be released before the end of 2010. Myriad appears to have an excellent position in a market that is likely to be growing for years to come, yet it's trading as if it was going into decline. This feels like an extraordinary opportunity to me.
Disclosure: Author long MYGN