Description

Investment Summary

The time has come to again short MYGN. MYGN is a very expensive stock even though nearly all profits are still derived from one test, which is under significant secular pressure.  We expect earnings to decline going forward, which usually does not bode well for a stock trading at >30x earnings.

Company Overview/History

MYGN has been written up numerous times in the past on VIC – we suggest you look at those write-ups for context/history. Rather than rehash those writeups, we will try to simply present the short thesis as it stands today.

The company is currently comprised of the following, which are principally genetic tests:

Hereditary Cancer (primarily myRisk/BRCA)

-74% of FY17 revenue, likely >100% of FY17 earnings

-Hereditary cancer screening, primarily used for Breast cancer.

GeneSight

-10% of FY17 revenue

-Determining which antidepressant(s) a patient should take

Vectra DA

-6% of FY17 revenue

- Evaluating patients with Rheumatoid Arthritis

Other genetic tests

-4% of FY17 revenue

Pharmaceutical & Clinical Services

-6% of FY17 revenue

-Biomarker discovery and services to biopharma industry

-Internal medicine emergency hospital in Germany

Key Points of Short Thesis

1) Effectively all the current profitability is from Hereditary Cancer, and this is under secular pressure.

a) myRisk has multiple competitors in the market, all of which are priced at substantial (some >50%) discounts to myRisk. The crux of the short thesis is that MYGN’s hereditary cancer business will be in secular decline going forward as the company continues to lose some combination of share and pricing.

b) The company offers the following points that purport to show the stability of its Hereditary Cancer franchise, which we believe are erroneous:

i)“Vast majority of business is under multi-year contracts with private payors”

1) These contracts are NOT exclusive, nor do they have volume guarantees. Customers are free to enter into contracts with MYGN competitors as well. Effectively these are more customer options than they are guaranteed contracts.

2) We expect that as share losses accelerate, MYGN will have to relax terms (ie cut pricing) significantly on these contracts in order to maintain the business.

3) There is already evidence of this: for instance, price cuts that even MYGN does not deny (though prices are still materially higher than that of competition). Also see the ANTM out of network decision, and we believe the new contract with UNH is under materially worse terms.

ii) “We have a superior offering to that of competitors’ thanks primarily to our database”

1) You don’t have to disagree with this to believe in the short thesis. In fact, we acknowledge that MYGN has the largest and longest-standing database, which is a key differentiator. The question though is if this is worth it to customers to pay an egregious price premium vs what competitors offer.

2) We believe “reference testing” will see accelerating growth – customers will first send tests to cheaper competitors, and if and when they are given uncertain results, they may then order a MYGN test. MYGN’s business in these cases will not go away, but will be reduced substantially.

iii)“The business is stable - volumes have grown in the past 2-3 quarters”

1) There is no way to verify this claim, but let’s assume it’s true.

2) This period follows an extended period of volume declines, and may just represent a small temporary reversion.

3) MYGN has also recently revamped its sales force which may have provided a short-term bump.

4) MYGN’s volumes has apparently grown in the low single digits, whereas the market likely is growing much faster. Thus, even with this volume growth, there is already unambiguous evidence of share loss (despite MYGN beginning to cut prices).

iv) “Despite having competitors for many years now, our Hereditary Cancer business is still the largest in the space”

1) The simple fact is there is meaningful inertia on behalf of customers. It often takes customers a while (many years) to evaluate alternatives and switch providers.

2) It is happening – see the ANTM decision to take MYGN out of network last year. UNH recently entered into a new contract that is widely believed to be at far better terms (ie worse terms for MGYN) than its prior one.

3) Thus, although the business hasn’t gone to zero – as some expected when the Supreme Court invalidated MYGN’s monopoly in 2013 – there is evidence of pressure that is building on MYGN’s core franchise.

2) The stock is very expensive

a) MYGN trades at ~38x the midpoint of its EPS guidance for FY18 (ending June 2018). If we tax-effect this for new lower US corporate taxes, the multiple drops to ~31x.

b) On an enterprise value basis, the stock trades for ~19x TEV/FY18 EBITDA.

c) Notably, FY18 EPS is roughly flat to FY17 EPS (at constant tax rate). EPS has declined ~57% cumulatively since the peak in FY14 (before MYGN really had hereditary cancer competitors). You are paying a very high multiple for the promise of future growth, which stands in sharp contrast to what has actually happened in the recent past.

3) GeneSight is not the savior to make up for Hereditary Cancer’s decline

a) The big hope for MYGN bulls is the GeneSight test, which MYGN acquired from Assurex in 2016.

b) GeneSight volumes have been growing nicely, but the big question is reimbursement. Management likes to tout that had GeneSight been fully reimbursed for FY17, it would have generated >$500mm of revenue (compared to ~$570mm of actual revenue generated by Hereditary Cancer).

c) However, this is a big red herring. Even in a blue-sky scenario it would take many, many years to achieve anything close to full reimbursement. There is simply a lengthy process involved in testing, analyzing, and convincing payors to reimburse.

d) More tangibly, GeneSight recently missed the primary endpoint on its first major trial. (http://www.epvantage.com/Universal/View.aspx?type=Story&id=744091&isEPVantage=yes). This is a MAJOR impediment to achieving reimbursement for the product. Management has spun the results of this study as actually a positive, saying that the secondary endpoints the trial reached are actually more meaningful to payors. We shall see. This is a management team that has consistently overpromised and under-delivered. See the experience with Vectra DA, it’s first venture outside of the core myRisk product, which has been nothing short of a massive disappointment.

4) “Multiple shots on goal” long thesis misses the point

a) Bulls also point to the various other products in MYGN’s pipeline as multiple “shots on goal” that can drive future upside.

b) The reality is that MYGN has no history of success with innovating any products whatsoever (other than its core Hereditary Cancer product) and as such we are wont to ascribe much value to this pipeline.

c) Even if MYGN is successful, these products are multiple years away from contributing anything material to MYGN’s earnings, and in the meantime, we expect the core franchise to be in secular decline.

Risks

1)  myRisk performs better than expected, actually stabilizes or even grows

2) Massive success from GeneSight

3) Accretive deployment of capital

To sum it all up, we believe that in order to own MYGN here, you have to be comfortable paying a very high multiple while believing that hereditary cancer is stable, GeneSight will be a massive home run, and other unproven shots on goal will pan out. We are comfortable betting against this confluence of events.

Catalyst

Secular decline of core HC franchise

GeneSight disappoints bulls