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Myriad Genetics, Inc. (NASDAQ:MYGN) focuses on developing and marketing products for the healthcare industry. While its Predictive Medicine Products help assess risks for various cancers, its Therapeutic Products focus on treating patients with Alzheimer's disease, cancer, obesity, thrombosis, and HIV.

In fiscal year 2006 (ended June 2006), diagnostic products such as BRACAnalysis (for testing breast cancer), COLARIS (for colon and uterine cancer), MELARIS (for skin cancer), and COLARIS AP (for adenomatus polyposis) contributed the bulk of the company s revenue of $114.3 million. The therapeutic products are under various stages of clinical development, and the company is developing these products either on its own, or in association with other corporate partners including Eli Lilly (NYSE:LLY), Bayer Corporation (BAY), Schering-Plough (SGP), and Novartis (NYSE:NVS). Notable collaborations in the Predictive Medicine division are with Abbott Labs (NYSE:ABT), DuPont (NYSE:DD), Pfizer (NYSE:PFE), and Roche (OTCQX:RHHBY). Based in Salt Lake City, UT, the company employs more than 650 people.

INVESTMENT THESIS

Growth in predictive medicine has been strong

Myriad currently has four predictive medicine products on the market. BRACAnalysis is a comprehensive analysis of the BRCA1 and BRCA2 genes for assessing a woman s risk for breast and ovarian cancer. It is a hereditary test designed to find mutations in the BRAC1 and BRAC2 genes.

Mutations in these genes can be associated with a 10 to 15-fold increase in ovarian or breast cancer. Similarly, mutations in the MLH1, MSH2, and MSH6 genes are associated with a nearly 40-fold increase in the risk for colon cancer or uterine cancer, and are identified by the company s COLARIS test. A new COLARIS AP test is used to find mutations that may lead to an increase in the risk for adenomatus polyposis (pre-cancerous colon polyps). Finally, the company's MELARIS hereditary test is designed to find mutations in the p16 gene, known to significantly increase the risk of melanoma. The company has focused on growing this business through internal development activities and through a distribution agreement with Laboratory Corporation of America Holdings.

Laboratory Corporation has a sales team of more than 700 representatives through which Myriad can now access more than 200,000 primary care physicians and specialists. The company has also formed major marketing collaborations with other organizations in foreign countries. These agreements, along with an increased focus on marketing activities, have allowed Myriad to gain sizable market share in predictive medicine. This gain is visible in the strong performance of the business in the fiscal year of 2006 and in the first nine months of fiscal 2007. Myriad is also developing molecular testing for Diabetes and Pancreatic Cancer.

Myriad Genetics is seeing solid growth in the predictive medicine business. Sales continue to grow rapidly in the third quarter of fiscal 2007. Sales in the fiscal third quarter was $38 million, representing a 41.4% growth year over year, and 11.2% growth sequentially. In the first nine months of fiscal 2007, sales were $103.0 million, an increase of 46% over the $71.8 million of the same period of last year. Gross margin of preventive medicine continued to increase in the third quarter. Gross margin reached 80% in the third quarter, an increase of 8 percentage point over the 72% gross margin from the third quarter of fiscal 2006 and an increase of 2 percentage point over the 78% gross margin in the second quarter of fiscal 2007. Improved gross profit margins primarily resulted from the introduction of new, more efficient operating systems. The increase in predictive medicine revenues reflects strong customer demand for Myriad's molecular diagnostics products due to the demonstrated clinical utility of the tests and the clinical value to patients.

We maintain our optimism about Myriad's predictive medicine. We expect continued double digit growth in this business in the coming quarters. Specifically, we estimate total revenue from predictive medicine will reach $145 million in fiscal 2007. We estimate sales in 2008 of $185 million and $225 million in 2009.

Drug development programs are promising

The Alzheimer's Disease Program: In drug development, the company is also making steady progress. Flurizan, its lead candidate for Alzheimer's disease, is designed to lower the levels of amyloid beta-42, one of the primary contributors to plaque that accumulates in the brain of Alzheimer's disease patients. Flurizan is currently under two pivotal phase III trials.

The company completed phase II trials with Flurizan in March 2005. The final results, reported in June 2005, demonstrated that Flurizan was well tolerated and beneficial in patients with mild Alzheimer's disease but not so beneficial in patients with moderate AD. Flurizan also demonstrated a 34% improvement with respect to the mild AD patients daily living activities.

On March 12, 2006, Myriad announced the data from its 21-month phase II follow-on study of Flurizan in patients with mild Alzheimer's disease at the 19th annual meeting of the American Association of Geriatric Psychiatry. The data suggested that study participants on 800 mg BID of Flurizan continued to demonstrate increasing benefit through month 21 in the area of cognition and memory loss and that they maintained more of their global function and activities of daily living than those on 400 mg BID of Flurizan or than the projected placebo. The data also suggested that during the follow-on period from months 12 to 21, the benefit of Flurizan on the measures of Alzheimer's disease increased in terms of both effect size and significance, the longer patients remained on Flurizan.

As measured by the performance of activities of daily living (ADCS-ADL), by patients taking 800 mg of Flurizan BID, there was a 52% effect size compared with the projected slope of the placebo at 21 months (p=0.029). In terms of the patient's global function at 21 months, the CDR-sb scale showed a 75% effect size (p=0.0007), also significant. These data suggest that there is a substantial benefit from Flurizan on activities of daily living and global function, and that the benefit is increasing over time.

The effect of Flurizan in improving cognitive decline, as measured on the ADAS-cog scale, has also increased, as shown by the effect size of 60% at 21 months (p=0.096). All three of the measures suggest sustained benefit from Flurizan in patients with mild Alzheimer's disease. The above results were further supported by the continued 24-month follow-on data of the phase II trial which was presented at the 10th International Conference on Alzheimer's Disease and Related Disorders, in Madrid, Spain on July 19, 2006. The data demonstrated the continued improvement in the area of cognition, global function and daily living activities in patients with mild Alzheimer's disease on 800 mg Flurizan.

On March 5, 2007, the company reported additional data from the above completed phase II trial at the annual meeting of the American Association for Geriatric Psychiatry [AAGP]. New data demonstrated that Flurizan may be capable of not only of slowing the decline of Alzheimer's disease, but of halting the disease in its tracks. In this study, many patients with Alzheimer's disease got no worse over two full years, and in some cases, patients treated with Flurizan appear to have improved. Overall, 42% of patients on Flurizan showed improvement or no decline in one or more of the three primary endpoints of cognition, global function and activities of daily living, compared to 10% of patients on placebo. The vast majority of patients in this Phase II study, approximately 94% at the time of enrollment, were receiving stable doses of acetylcholinesterase inhibitors, which are FDA-approved drugs for symptomatic treatment of Alzheimer's disease. Thus, the benefits of Flurizan observed in these patients were over and above the current standard of care.

Since Flurizan appears to slow the biological progression of the disease, this is an exciting and novel finding, and if replicated in the ongoing phase III trials will be extraordinarily important.

Based on the phase II results, and after holding discussions with the FDA, the company decided to modify the protocol of the phase III trial in the US, initiated in January 2005, to focus more on the mild AD indication. In this modified trial, the company will evaluate a twice daily dosage of 800 mg Flurizan on mild AD patients.

On August 22, 2006, the company announced the completion of about 1600 patient enrollment for this trial. We expect the company to file in late 2007 if results are positive, followed by an approval in 2008. Patient data will be analyzed after 12 months, but patients will remain on treatment for 18 months to allow for additional follow up data. All patients in the U.S. phase III study are permitted to take current standard of care medicines in addition to Flurizan or placebo. Therefore, benefits seen in the trials are over and above any benefit provided by the current standard of care drugs.

Myriad also started to enroll a global phase III trial in July 2006 in patients with mild Alzheimer's disease in Italy, France, Germany, Spain, Sweden, Switzerland, the United Kingdom, Netherlands, Belgium, Canada and Denmark. The trial will enroll approximately 800 participants into two groups, 800 mg twice daily and placebo, and the participants will receive treatment for 18-months. The primary endpoints in the global trial are identical to those of the U.S. phase III trial and are the same as two of the three endpoints in the phase II study. The trial is designed to meet the requirements of the European Agency for the Evaluation of Medicinal Products [EMEA] for marketing approval of Flurizan in Europe. In March 2007, the company announced the completion of enrollment of the global phase III trial. EU filing could come as early as in the 1H08, followed by approval in 2009.

Management stated that they will look for a partner to commercialize Flurizan once phase III data becomes available. We are optimistic on this compound because current Alzheimer's drugs do not slow the progression of the disease, they only treat the symptoms. If successful, Flurizan could be the first drug approved by the FDA for mild Alzheimer's that has a preventative indication.

The Prostate Cancer Program: In addition, Myriad is evaluating R-flurbiprofen (Flurizan), also known as MPC-7869, for prostate cancer in a phase II/III clinical trial. On January 8, 2007, Myriad announced the results of the trial. The clinical trial was designed to evaluate the safety of MPC-7869 and to consider its potential efficacy in slowing the rate of progression of prostate cancer among 246 patients with advanced disease.

The two primary clinical endpoints of the trial were the time to systemic disease progression and the change in velocity of Prostate Specific Antigen levels. Statistical significance was not achieved for either of the endpoints, and therefore the Company does not intend to pursue further development of this compound in cancer. However, the study showed that MPC-7869 was well tolerated over long-term administration in an elderly population, confirming the data from previous studies. With the completion of this study, Myriad now has over 1,200 patient-years of safety data on this compound, with a maximum exposure period of 44 months. The safety data collected in this trial will be very useful to its program in Alzheimer's disease. The age of the study population is similar and the 800 mg twice daily dose of MPC-7869 is identical to that of its two ongoing phase III trials in Alzheimer's disease.

The Brain Cancer Program:
The company is evaluate Azixa (MPC-6827) for brain cancer. Azixa is a novel small molecule inhibitor of microtubule formation that has demonstrated the ability to inhibit tumor growth in pre-clinical testing. Myriad acquired Azixa with a licensing agreement from Swedish biotech firm EpiCept. The candidate shows activity in animal models of human melanoma and cancers of the ovary, breast, prostate, colon and pancreas. However, the biggest potential lies in brain cancer or glioblastoma. The compound has the ability to cross the blood brain barrier which is something very few chemotherapy or targeted cancer agents fail to do. Early clinical testing demonstrated a concentration nearly 40-50x that of traditional agents in the brain. This could make Azixa a very potent agent for fighting cancer that has spread to the brain.

Myriad believes that Azixa is also quickly cleared from the brain after dosing, allowing for aggressive use of the drug. The candidate also has the potential to become less resistant over time given its novel mechanism.

In September 2006, Myriad announced the results of two phase I trials for Azixa. The agent achieved its maximum tolerated dose. Most importantly, Azixa demonstrated measured reduction in tumor size in some patients. Based on the results of the phase I trials, the company initiated two phase II trials of Azixa in patients with brain cancer or metastatic brain cancer in Mar 2007. The first phase II trial is designed to determine the safety profile of Azixa and the extent of its ability to improve the survival of patients with glioblastoma. The trial will compare the survival of patients treated with Azixa to those treated with oxaliplatin, and to those treated with Azixa plus oxaliplatin. The trial is designed as an adaptive, open label, multiple dose study in patients with recurring or relapsed glioblastoma.

Patients will be randomized into one of three treatment arms. Periodically, an analysis of efficacy will be conducted to determine the final size of the second stage of the trial. The trial is expected to enlist the participation of approximately 50-70 centers in total, through both stages of the phase II, in the United States and Europe.

The second phase II trial is designed to determine the safety profile of Azixa and the extent of its ability to improve the overall survival of patients with melanoma skin cancer with brain metastases. The trial will compare the survival of patients treated with Azixa to those treated with temozolomide or the combination of Azixa plus temozolomide. The trial is designed as an adaptive, open label, multiple dose study in patients with metastatic melanoma. Patients will be randomized into one of the three treatment arms. The study may enroll up to 150 patients per arm.

Myriad is also developing MPC-2130 for cancer indications. MPC-2130 is a broad-acting inducer of apoptosis in cancer cells. MPC-2130 promotes programmed cell death in tumor cells at a later point in the apoptotic pathway. This leads Myriad management to believe that MPC-2130 may have additive or synergistic activity with other cancer compounds which work at earlier stages of the apoptotic pathway. MPC-2130 is in phase I development. We hope to see the phase I data later this year in advanced metastatic tumors or blood cancers as well as refractory cancers that have progressed despite previous chemotherapy.

In May, 2006, Myriad initiated a phase I human clinical trial of MPC-0920, an orally available, direct thrombin inhibitor. The trial will enroll healthy volunteers in a single, escalating dose format. The phase I is designed to determine the safety, dose range and pharmacokinetics of the drug candidate. There are eight volunteers per cohort, six of whom are given the drug and two are given placebo. The dose escalation will continue until a blood clotting time that is several times higher than normal and sufficient to ensure clinical utility in thrombotic conditions is reached. The primary objective is to examine the safety of MPC-0920 and a secondary objective will be to study the biological activity of MPC-0920. Because MPC-0920 demonstrated an effect on blood clotting time in animal studies, even at very low dose, the company expects the phase I trial to show it to have an effect at low dose in humans as well. This may allow the company to determine a biological effect in the volunteers, which is unlike the situation in most phase I studies. MPC-0920 has been the subject of 27 preclinical studies to date, comprising safety, toxicity, pharmacokinetics and formulation. The company also plans to bring MPI-49839, an orally active HIV maturation inhibitor, into clinic this year.

Financial position is strong

Myriad Genetics relies on its predictive medicine for its revenue generation. At March 31, 2007, the company had $304 million in cash, cash equivalents and marketable securities. The company has no long term debt and no convertible securities. The current cash is more than enough to last through fiscal 2008, in which year the company will be profitable and will generate positive cash flow from its operations.

RECENT NEWS
June 19, 2007: Myriad Genetics, Inc. announced the start of two phase II trials for a new compound being tested to treat patients with BRCA1 & BRCA2 positive breast and ovarian cancer. AstraZeneca's KuDOS Pharmaceuticals is running the international, multi-center clinical trial and will reimburse Myriad for provision of the molecular diagnostic testing for the trial. Myriad has exclusive worldwide rights to diagnostic applications of the findings from the study and KuDOS, all rights to its therapeutic applications. The ICEBERG (International Collaborative Expertise for BRCA Education and Research through Genetics) studies are intended to evaluate the ability of AZD2281 (KU-0059436), a PARP (poly-ADPribose polymerase) inhibitor, to treat patients with breast cancer or ovarian cancer associated with an inherited mutation in one of the cancer genes, BRCA1 or BRCA2.

Jun 11, 2007: Myriad Genetics, Inc. announced that it presented a mathematical comparison of a "Staggered Start" and a "Randomized Withdrawal" clinical trial design with a "Natural History Staggered Start" clinical trial design at the Alzheimer's Association Prevention Conference held June 9 - 12, 2007, in Washington, D.C. The analysis demonstrates that the "Natural History Staggered Start" trial design currently being used in the Flurizan phase III study can provide the same level of disease modification support as the cross-over trial designs, which are challenged by ethical concerns, dropout bias and complications.

A team of biostatisticians and mathematicians at Myriad has proposed an alternative strategy designated the "Natural History Staggered Start" analysis, that compares the slopes of decline of drug treated patients with those of patients receiving placebo and corrects for the severity of disease at baseline. The mathematical analysis presented at the Alzheimer's Association AD Prevention Conference demonstrates that this trial analysis methodology is mathematically equivalent to the "Staggered Start" and "Randomized Withdrawal" designs and provides the same level of evidence of a disease-modifying drug effect in a clinical trial that is not subject to the above-mentioned complications, bias and ethical challenges of the previous designs.

May 01, 2007: Myriad Genetics, Inc. reported consolidated financial results for the third quarter of fiscal 2007 and the nine months ended March 31, 2007. Molecular diagnostic revenues for the third quarter of fiscal 2007 were $38.0 million, compared with $26.9 million in the third quarter of fiscal 2006, an increase of 41%. For the nine months ended March 31, 2007, molecular diagnostic revenues rose to $103 million, from $71.8 million in the same period in fiscal 2006. Compared with the second quarter of fiscal 2007, molecular diagnostic revenues achieved a sequential quarterly increase of over 11%. Increased sales, marketing and educational efforts continue to result in wider acceptance of Myriad's products by the medical community and increased demand by patients for molecular diagnostic testing, driving increased revenues. Total revenues for the quarter were $41 million, compared to $29.8 million in the same period last year. Net operating profits for the Company's molecular diagnostic business increased to $16.2 million, representing a 43% net operating margin in the third quarter of fiscal 2007. This result compares with $9.6 million, for the same quarter of fiscal 2006, a 69% increase in net operating profits. The net loss for the third quarter of fiscal year 2007 was $5.9 million or $0.14 per share, which compares favorably to $9.6 million, or $0.24 loss per share in third quarter fiscal 2006. This improvement represents a reduction in loss of 42% on a per share basis. The Company ended the third quarter in strong financial condition with no debt and approximately $304 million in cash, cash equivalents and marketable investment securities.

RISKS

  • The Increased drug development costs have offset the growth and profitability of the company s diagnostic business, and as a result, the company has yet to turn a profit. Myriad posted a loss of $38.2 million or $1.05 per share in fiscal 2006. We forecast continued losses in fiscal 2007, and the company will become profitable in fiscal year 2008.
  • The previous phase II data on Flurizan has been mixed. The candidate showed a good response benefit in mild Alzheimer's patients but not in moderate Alzheimer's patients. Also, while Flurizan demonstrated improvement in activities of daily living and function, the trial was not statistically significant in cognition although positive trends were observed. We are hoping that the recently expanded Flurizan phase III trial is now powered to yield statistically significant results. We believe that Flurizan does work, but risks remain on the outcome of the phase III trial.
  • INSIDER TRADING AND OWNERSHIP
    Institutional owners control 85% of the shares outstanding. The largest reported holders of Myriad Genetics shares as of the end of this quarter were: Price T. Rowe Associates, FMR Corporation, Rainier Investment Management, Pinnacle Associates, Barclays Global Investors Intl., Vanguard Group, Franklin Resources, Baker Brothers Advisors, Wellington Management Company, Royce & Associates, and Fidelity Small Cap, all of which hold over 3% of the total shares outstanding. Insiders control roughly 15% of the total shares outstanding. Over the past six months, there has been limited insider activity. This is consistent with what we have seen in the past. We expect automatic or planned sales throughout 2006, but nothing that will be a major impediment to our Buy recommendation. We regard the insider trading activity as negligible on the stock.

    KEY POINTS

  • Sales of the Predictive Medicine business continued to grow dramatically in the third quarter of fiscal 2007. Sales were $38 million in the fiscal third quarter, up 41.4% year over year, and 11% sequentially. Further, gross margin increased to record 80% in the third quarter.
  • Myriad's heredity tests such as BRACAnalysis, MELARIS, and COLARIS are helping primary care physicians and specialists alert patients with, in some cases, a 10 to 50-fold increase risk for certain types of cancer. We continue to be optimistic about the growth of predictive medicine in fiscal year 2007 and beyond as Myriad works to increase physician education on heredity testing.
  • We are excited about the market potential for Flurizan, a phase III candidate for the treatment of mild Alzheimer's disease. Flurizan's differentiating characteristics are its ability to slow the progression of the disease and improve the quality of life of patients, and that it can be dosed at high concentrations without significant safety or tolerability issues.
  • We are also optimistic on the potential for Azixa (MPC-6827), a novel small molecule that the company believes can be used in brain cancers and glioblastoma given its unique ability to cross the blood-brain barrier. Other early-stage candidate such as MPC-2130 for hematological cancers and MPI-49839 for HIV round out Myriad's impressive research efforts.
  • We had recommended to investors to Buy shares of Myriad Genetics in early February 2006. Since then the shares have appreciated about 76%. We continue to rate Myriad a Buy. We believe that valuation is still attractive given the potential to be profitable in fiscal 2008 on the launch of Flurizan. In the mean time, a solidly growing predictive medicine business should continue to help Myriad post lower losses. Our target price is $45.
  • VALUATION
    We continue to rate Myriad shares Buy and maintain our target price to $45. The predictive medicine business has been performing very well. Sales continued to grow in the fiscal third quarter of 2007 by 41.14% year over year and 11% sequentially. Further, gross margin increased to record 80% in the third quarter. The company should be profitable in fiscal 2008.

    We maintain our optimism on the predictive medicine and believe predictive medicine will keep a double digit growth in the coming quarters. The drug development programs are all on track. Long-term growth should come from the successful commercialization of Flurizan for the treatment of Alzheimer's disease. The company completed the enrollment of both its US phase III trial and global phase III trial with Flurizan. Previous phase II data, admittedly mixed, still gives us confidence in this phase III trial.

    We think that fair value for MYGN is $45 per share. We arrive at that figure by applying a 38 x biotech industry avarage P/E ratio to our fiscal 2009 EPS of $1.79, discounted at 25% for two years.

    We expect Myriad Genetics will become profitable in fiscal 2008 based on the successful launch and partnering of Flurizan.

    MYGN 1-yr chart:

    Source: Myriad Genetics: Exciting Alzheimer's Treatment In the Pipeline