Myriad Genetics: Teeming With Opportunity

After recently hearing a presentation by the company at a conference, I added Myriad Genetics (MYGN) (36.35, $1.56 billion market cap, Russell 2000 member) to my focus list of about 100 stocks.

While the stock has been quite the performer, adding 16% on top of the 50% gain last year and the 75% return in 2004, I think that this one will probably continue to reward investors.

MYGN is two companies in one. On the one hand, they are a very successful cancer diagnostics company, with four tests on the market and two on the way. They are also a therapeutic development company, with the two main drugs in the pipeline being Flurizan (Alzheimer’s – Phase 3) and Azixa (Cancer – Phase 1). Both of these drugs are quite interesting, as there is no cure for Alzheimer’s or for Brain Cancer. Bulls would tell you that the market doesn’t fully appreciate these two “different” businesses. Bears would say that they need not be married (and perhaps more). I would suggest that Wall Street often has a difficult time analyzing hybrid companies. What the CEO said, though, was extremely telling. When asked why the company doesn’t split up, he responded that the company believes that their approach is the way of the future, and this makes a lot of sense to me. I reviewed a research meeting at M.D. Anderson in May that enthusiastically endorsed the same view: Personalized medicine integrates detection and treatment.

Speaking of the CEO, I was extremely impressed by his depth of knowledge and passion. I reviewed his background and discovered that he has been with the company since the beginning in 1991. I highly recommend that the reader visits their website to learn about his background and the breadth of experience and talent within the firm and on its board. Some of the highlights include the Nobel Prize winning founder of Biogen, the former CFO of Amgen and a former FDA Commissioner. I was encouraged to see that the company appears to have added the right talent at the right time as it has emerged from no products, to a diagnostic provider and now a more integrated firm.

Looking at the finances of the company, the company has equity of $339mm, which is primarily cash of $304mm (including the money raised by selling 3mm shares in February). The company has $25mm of AR, $27mm of PPE and just $23mm of liabilities. The company had product sales of $41mm in the last quarter (GM=81.5%). Analysts project 2007 sales of $175mm, up from $114mm last year. The company plowed back $84mm into R&D last year. So, while the company loses money, it is clear that the left hand is borrowing from the right hand, with the company harvesting the diagnostics business to invest in their therapeutic pipeline.

So, diagnostic investors, see a company generating “losses”, while biotech investors potentially see a complicated valuation calculation. Clearly, not everyone is so burdened, as the stock has been appropriately reflecting, at least directionally, the improvements in the core business and the advancement of Flurizan. Digene (DIGE) was just taken out at 7X trailing sales. Applying that multiple gets one to a value of $800mm on the diagnostics business, though that is perhaps very conservative. MYGN is growing faster and has more shots on goal in the cancer diagnostics arena. One can argue that the diagnostics business at MYGN could be worth the entire market cap of the company.

I am going to watch this one very closely. Investing in the company is probably one of the better ways to capture the theme of personalized medicine. The balance sheet is strong, the record of success is admirable and the management team and the board consist of industry leaders. Technically, the stock is in an uptrend, with strong support just below the current price (35, near the price of the secondary public offering) and greater long-term support at 31.

Disclosure: No position