Many articles have been written in SA about Myriad Genetics (NASDAQ:MYGN) - some bullish, some bearish. This is a bearish article, looking the company from different angle. In a nutshell, Myriad's claim to fame and fortunes rests on tests for genetic mutations. Most of Myriad's revenues (85%) come from its BRCA test for breast cancer, each test costing about $4,000. The results of this test convinced Angelina Jolie to get a double mastectomy in May. And which popped Myriad shares to a 52 week high.
The Supreme Court Decision on June 13 put paid to the Jolie bump and the stock sank on massive volume. In essence, the court ruled that Myriad could not patent the human genome, though it could patent plasmids and cDNA, allowing in competitors for those tests. In response Ambry Genetics announced plans to introduce a test soon for $2,200 and Quest Diagnostics would by the end of the year. Gene by Gene, based in Houston, plans to offer the test for $995. Of course, Myriad sued Ambry and Gene by Gene, and the stock began to climb again, though not reaching its Jolie peak. On Aug 13, the company reported earnings that beat expectations handily, yet the stock fell. So the question is, is this a buying opportunity, or time to exit? A few aspects that have not been covered by other authors are outlined below that an investor may want to cogitate over.
1. It's not the news that matters, it's the reaction to the news. This is one of the earliest lessons I learnt while investing. I used to wonder why a stock fell on good news and rose on bad. It was the realization that the news was baked into the stock and Mr. Market, being forward looking, had discounted that. So the negative reaction of the street to the earnings beat of Aug 13 is worth noting. Not only the earnings beat, but also the positive guidance. It's the market's way of saying we don't believe you, your best days are behind you.
2. ACA acts up. ACA being the Affordable Care Act. Under this regulation, the health care provider has a "financial quota" for a patient. Based on bean counters and astrological charts (the latter being more accurate), the Government decides how much the care for a disease should costs, and the provider will be given that money. Go beyond that amount, and the physician is penalized financially. Stay under the quota and the physician in rewarded, again financially. Naturally, tying to save money, the physician will stop ordering as many tests as before (this being the unstated intent), including tests such as that from Myriad. Even if the physician in question does order the test, s/he will choose the cheaper option such as those by Gene by Gene or Ambry, again hurting Myriad. Perhaps in response, Cigna announced on Aug 20 that anyone wanting the BRCA test would have to get genetic counseling. And if the counselor did not consider it necessary, no test. This is a double whammy for Myriad, with possibly fewer tests of BRCA, and possibly, in the future, of all its diagnostics.
3. The long and short of it. There is increasing short interest in Myriad. As of Aug 15, even before the Cigna announcement, there was a 2,163,582 share increase in total short interest for Myriad Genetic, an increase of about 20% since the end of July. While some may think increasing short interest makes for a lively short squeeze later on, I avoid stocks with increasing short ratio. Shorts are not fools, and generally due their homework more carefully than longs, since there is a much greater financial risk being short than long.
4. Technicals. For those who think technical analysis belongs in a Harry Potter book in the class for Dark Arts, stop reading. For those willing to consider, take a look at the chart below (Courtesy Stockcharts.com). While every TA has his/her favorites, with advantages and disadvantages of each indicator, the one's I focus on are below.
a. Moving Average. The stock has broken down below its 200 day moving average and the 13 day is about to cross the 200 day average on the downside.
b. Volume. The OBV (on balance volume) has been in a down slope since end of July. OBV generally characterizes the volume of buying minus selling, and thus shows investor interest. The selling days have had larger volumes than buying days.
c. TRIX. I use TRIX, a momentum oscillator that depicts the rate of change, because it is smoother than MACD, and it turned negative around the first of Aug, with the black line crossing the red.
Based on the above, I feel the chances of making money by being long Myriad is unlikely. More gains could be had on the short side.