Breaking Down Myriad's Wild Ride And Epic Slide

| About: Myriad Genetics, (MYGN)

Earlier this month Myriad Pharmaceuticals (NASDAQ:MYGN) saw its stock take a wild ride shooting up to a high of $38.27 on June 13th, only to fall back to close at $27.59 the very next day. Many investors and analysts alike failed to realize what a major Supreme Court ruling decided on the 13th really meant to Myriad and its future that is now very much in doubt. Initially these same people considered the ruling to be a victory for Myriad in one way or another and yet at least for the short term, it was quite the opposite affair.

The major ruling that hurts Myriad

The Supreme Court Ruling in Association for Molecular Pathology vs. Myriad Pharmaceuticals was correctly assumed to be about patents not being applicable to naturally occurring DNA. This same ruling did allow for patent eligibility and protection pertaining to cDNA or synthetic complementary DNA but this alone does little to protect Myriad's patents for its proprietary BRCA1 and BRCA2 gene testing.

BRCA1 and BRCA2 genes belong to a class of genes that are known tumor suppressors and mutations in these genes have been proven to increase the risk of developing breast or ovarian cancer to a high degree and other indications to a lesser degree. Both men and women can have the mutation and even in men, breast cancer incidences can be far more likely to occur with the mutation.

According to the ruling, "A naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated." Myriad's DNA claim to patents for its BRCA1 and BRCA2 testing were ineligible because "Myriad did not create or alter either the genetic information encoded in the BRCA1 and BRCA2 genes or the genetic structure of the DNA" and that basically "discovery does not by itself satisfy the 'useful composition of matter' S101 inquiry." Simply put, the work Myriad did to discover and isolate the BRCA1 and BRCA2 genes was good for science and can't be proprietary information.

Where Myriad falls short with its BRCA Tests

Furthermore, the ruling opened the door to the creation of synthetic DNA or cDNA by ruling that since cDNA is an "exons-only molecule" and has no "introns" it is thereby no longer natural or naturally occurring. Myriad was hoping that at least the altering of the DNA by severing bonds prior to the testing procedure coupled with the extensive work in isolating and discovering the genes would help its cause, but reading of the altered gene still didn't classify it as a new composition or a complementary classification of the gene, according to the ruling. Any testing of a gene sequence that is exactly as it occurs in nature does not qualify the procedure or preparation of the DNA for patent protection.

The immediate effect of this ruling was to end Myriad's monopoly with BRCA testing which was set to expire in a little more than two years and to open the door to next generation testing for the BRCA1 and BRCA2 genes that is more advanced than the testing Myriad currently employs.

Immediately following this ruling, Bio-Reference Laboratories (NASDAQ:BRLI) announced that it would start BRCA1 and BRCA2 testing through its subsidiary, Gene Dx as early as August of this year. Quest Diagnostics (NYSE:DGX) and Ambry Genetics are ready to capitalize with their own BRCA1 and BRCA2 tests. Gene Dx happens to be the first commercial laboratory to utilize next generation sequencing (NYSE:NGS) while Quest and Ambry have been patiently waiting for this opportunity to offer NGS technology based BRCA1 and BRCA2 testing. Myriad is still utilizing outdated CE-based methods in its proprietary testing procedures. The next generation testing allows the complete gene to be sequenced in far less time with millions of parallel reactions allowing long strands of DNA to be sequenced in less time and with greater accuracy. What used to take 10 years to sequence with CE-based technology (example - 5 human genomes) can take less than a week with NGS sequencing.

What it all means for Myriad and its stock?

What is in store now for Myriad has more to do with how fast competitors can get their competing tests out as well as gain acceptance for them. Why this is such a big deal for Myriad is because the BRCA tests are responsible for 74% of Myriad's revenues. Myriad offers many other tests, but patent protection for isolating genes has been more clearly defined by the previously outlined Supreme Court ruling and competition is likely to encroach on even more of Myriad's testing platform.

At first glance, Myriad seems to have plenty of upside to offer investors. Revenues and profits have been on a steady rise, reaching $156.47 million and $37.89 million respectively in the first quarter of this year. These are not bad quarterly figures for a company with a market cap of just over $2 billion. Myriad also has a respectable P/E ratio of 16.73 and a better forward P/E ratio of 14.11. The EPS is 1.57 and the PEG ratio is even a low 1.14 offering further evidence that earnings have not been an issue of Myriad's. There is also over $336 million in cash to show for what has been a good run of profitability. Myriad even has no debt, $152.6 million in free cash flow and $143.2 million in levered cash flow to add icing to the cake. These are all dream figures for a company in the biotechnology sector.

Unfortunately, the end of the BRCA testing monopoly that Myriad has enjoyed is going to have an effect. NGS testing is faster and will be cheaper as more tests can be run in less time and this fact alone is going to give Myriad's competitors a price advantage to go along with speed in getting results to patients and physicians alike. If the competing product is better and is produced by multiple competitors on top of that along with no patent protection, what hope is there for Myriad to maintain that 74% chunk of revenue that it now enjoys?

The answer for Myriad might come from the ruling on synthetic DNA that the Supreme Court seemed to uphold. Patents for producing these synthetic strands of human DNA can still be valid and Myriad does have plenty to gain in this marketplace that should benefit from this Supreme Court ruling. Synthetic DNA will likely have immediate laboratory acceptance even if using it for treatment in living humans might be hard to see happening any time soon.

Myriad's shares closed up 1.90% to reach $26.24 a share yesterday (Monday, June 24th) as trading last week saw shares fall below $27 on June 17th and trading in the $26 range ever since. It is hard to say what more is in store for Myriad but the speed at which competitors jumped to offer their own BRCA tests is sure to be faster than any advancements Myriad is sure to make with synthetic DNA. In this case, try not to be fooled by the good looks of Myriad's fundamentals as I initially was. Myriad looks like a champ, but even the Titanic was billed as being unsinkable and we all know what happened with that.

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.

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