Myriad Genetics: Waiting on “Little Boy” and “Fat Man” to Drop

Link to News Story
April 25, 2016

Ok, so that headline may be a bit dramatic; however, Myriad Genetics, Inc. (NASDAQ: MYGN) is facing two major headwinds that that will very likely be unkind to the company’s stock price over time.  In August of 1945, President Harry S. Truman authorized the dropping of two nuclear weapons on two specific cities in Japan: “Little Boy” on the city of Hiroshima on August 6th, 1945 and “Fat Man” on the city of Nagasaki on August 9th, 1945, telling Japan to surrender or “expect a rain of ruin from the air, the like of which has never been seen on this earth.”

While we are not expecting anything as dramatic as a “rain of ruin” for Myriad, we do believe the company is facing two major toxic overhangs:

     1.   The potential for increased competition resulting from a lack of patent protection (Little Boy)
     2.   Limitations on pricing as a result of increasing health care costs being brought to the forefront

                 of political thought (Fat Man)

According to the company’s website, Myriad is “focused on revolutionizing patient care through the discovery, development and marketing of transformative molecular diagnostic tests that address pressing clinical needs across multiple medical specialties…We are expanding our reach and increasing our impact on patient care by introducing new molecular diagnostic and companion diagnostic tests for a growing number of diseases.  We also are focused on expanding internationally in an effort to broaden our geographic footprint and provide our life-saving products and services to patients and healthcare professionals around the world.”  The company has a dedicated “4 in 6” mission: Answering four patient questions (Will I get a disease? Do I have a disease? Should I treat this disease? How should I treat this disease?) across six medical specialties (Oncology, Preventive Care, Urology, Dermatology, Autoimmune, and Neuroscience). 

The results of the New York primary last week fairly well established Hilary Clinton as the democratic nominee and Donald Trump as her republican counterpart.  Mrs. Clinton’s website specifically states, “Hillary Clinton will lower (medical) costs for Americans by limiting out-of-pocket spending, increasing competition, and demanding value for their purchase.”  While the statement specifically refers to prescription drug pricing, we believe she very well will apply that same thought process to diagnostic testing: encouraging competition to assist in keeping diagnostic costs under control.  We can expect this to have a two-fold impact on Myriad Genetics: a price overhang and the threat of increased competition, especially given the company’s lack of patent protection.  Mr. Trump apparently has similar views given his statements regarding saving Medicare billions of dollars by allowing it to negotiate drug prices “directly with pharmaceutical companies.”  Democrats have wanted to give Medicare that power since around 2003, when the Medicare drug benefit law was passed — but Republicans have always blocked it.  The pharmaceutical industry, a major player on Capitol Hill, has consistently blocked such proposals.

Similar to the price overhang facing the company, the US Supreme Court’s unanimous 2013 ruling that isolated human genes cannot be patented represented a major defeat for Myriad, which had previously been awarded key patents on its BRCA1 and BRCA2 genes in the 1990s.  The Women’s Rights Project of the American Civil Liberties Union had challenged the patents on behalf of scientists, researchers, and patients who believed the patents stood in the way of further research on genes and limit the availability of testing.  ACLU staff attorney Sandra Park commented at the time of the ruling, "Today, the court struck down a major barrier to patient care and medical innovation…Myriad did not invent the BRCA genes and should not control them. Because of this ruling, patients will have greater access to genetic testing and scientists can engage in research on these genes without fear of being sued."  According to Justice Clarence Thomas, “"Myriad did not create anything…To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention." 

A year later, Myriad chalked up another defeat in its quest to defend its patents for the BRCA1and BRCA2 genes.  Myriad had attempted to block its competitor Ambry Genetics from offering competing tests to determine BRCA gene mutation status; however, a US Court of Appeals in Utah ruled in favor of Ambry stating that the claims from three of the patents covering DNA-based BRCA1 andBRCA2 tests that Myriad is asserting against Ambry did not contain subject matter that is eligible for patent protection.  "Myriad did not create or alter any of the genetic information encoded in the BRCA1 or BRCA2 genes. The location and order of the nucleotides existed in nature before Myriad found them," the US Court of Appeals for the Federal Circuit stated in their opinion.

Women with mutations in the genes BRCA1 or BRCA2 are five times more likely to be diagnosed with breast cancer, according to the National Cancer Institute. That means that 60 percent of women with a BRCA mutation will develop breast cancer in their lifetime, compared to 12 percent of women in the general population.  But less than one percent of women actually have a BRCA mutation, making costly genetic testing unnecessary for most.  This has translated into a confluence of lousy numbers in Myriad's top line revenues for the past couple of years.  Between Q1-2008 and Q4-2013, the company saw double digit growth in quarterly total diagnostic revenues, with some quarters experiencing a more than 50% rate of growth over the same time period the prior year.  We calculated average quarterly revenue growth during those 24 months at a whopping 27.3%.  However, during the past 10 quarters, quarterly revenue growth has been on a steady path south.  The first quarter of 2014 saw a growth rate of 51.7% in revenues…by the fourth quarter of the same year, the growth rate had fallen to 8.4%.  Three of the four quarters of FY2015 saw negative revenue growth, a first since before 2008!  Top line numbers for the first two quarters of FY2016 have grown at a paltry 4.5% in Q1-2016 and 1.9% in Q2-2016.

Given all of the above, the marketplace seems rightfully skittish regarding Myriad.  Indeed, an instance of below expected pricing on a panel code at Noridian (the Medicare Administrative Contractor responsible for diagnostic tests for both Myriad Genetics and InVitae Corp.) triggered a massive selloff last Tuesday.  Noridian priced a hereditary breast cancer panel code for InVitae at $622.53 (well below the $950.00 proposed by the company), a near 35% reduction of InVitae’s asking price!  While this does not impact Myriad directly, Leerink Partners' analyst Dan Leonard noted that “this preliminary pricing is a surprise to investors,” and further noted that he expected, it would only “exacerbate this pricing overhang on MYGN’s hereditary cancer testing business, which comprises 85% of its revenue.”  And while Medicare specifically comprises less than 10% of Myriad’s revenues, clearly this panel code pricing can definitely be seen as a portent of things to come for the company.

Disclosure:  We are short MYGN.  We do not have a financial relationship with the company.