Short MYGN (Myriad)

Myriad has recently had a life-changing event that should soon drop its profits to zero, and I expect the stock to drop at least 60-70%.  The Supreme Court ruled a few months ago that key patents related to their core product (~80% of revenue, 90% of profit) of testing for breast cancer are invalid.  This is widely known, however. The stock has barely budged as investors believe Myriad will only slowly lose market share (30% drop by 2018 in the words of one analyst).  This thesis was reinforced when Myriad kept guidance for the following quarter.  However, I believe they have already started to quickly lose market share, but this market share loss was hidden by a one-time surge in testing related to Angelina Jolie, who in late Spring took the test and credited it with helping her save her life.  If it wasn’t for this, I think the deterioration in their business would already be apparent.   The key part of this thesis, however, is that the competition is MUCH stronger and faster to market than the sell side realizes.

Background:

Myriad Genetics had tried to patent humane genes, including one that is a good predictor of hereditary breast cancer.  It is a nice business, charging $3,300 for a test with a >85% gross margin.  The Supreme Court ruled in June 2013 that you can’t patent human genes which knocked out many of the patents protecting Myriad.  Before that, Myriad had zero competition in the US (but plenty outside the US) due to patent protection.

Lawsuit and Patent claims:

Myriad is still saying they have valid patents related to “method claims” and have filed suit against those trying to offer the test.  Method claims are, in my experience, awful weak because you can always find ways around them.   This article has a discussion of the remaining Myriad patents. http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/12/you-cant-patent-human-genes-so-why-are-genetic-testing-companies-getting-sued/.   The Amici Curiae Brief filed 27-August by the ALCU, AARP, Public Patent Foundation, and Breast Action Cancer, on behalf of Ambry and Gene by Gene (the other company offering these tests) offers a wonderful detailed rebuttal Myriad’s remaining lawsuit. http://www.patentdocs.org/2013/08/amici-submit-brief-in-support-of-ambry-genetics-and-gene-by-gene.html

Also, the sell side doesn’t necessarily expect those patents to hold, they just think it will take years for real competition to come in due to Myriad’s head start.  This is largely because the large public players that analysts are familiar with, such as Quest, just have somewhat vague plans to offer within a year, but there is no idea as these tests cost or efficacy.   A recent sell-side analyst report said that, "The Quest test isn't launching until year-end and will take some quarters to determine its impact; thus, (it will take) time to see this play out.” 

Why this is a short:

What the sell side is missing is the real competition isn’t Quest, which is public and they know, its private companies that are very well respected in this field but which are below the radar, and which are aggressively offering this now.

Key events:

Within hours after the ruling, a company called Ambry Genetics began offering the same tests at 1/3 less cost per test.  I believe their test is very low cost, although given the high gross margin it doesn’t matter that much.  Ambry is a private company way under the radar, although not in any ways small or understaffed.   Previously, they have become the largest player in Cystic Fibrosis (CF) testing, beating up on Quest and others.  I’ve talked people at Quest and they think very highly of Ambry and in fact I think they look at Ambry as a new leader in the field.  Ambry now gets their CF tests covered as the preferred CF test by the major insurance companies, which is a long process but it really made them a player.    Ambry has a large and good staff of scientists to produce good tests.

Ambry’s test:

I’m told it’s as good as the competition, and 1/3 lower price.  The insurance companies know Ambry and so I believe that they will grant Ambry the right to perform the tests instead of Myriad, if Myriad has a high price point.  In fact, some calls into insurance companies tell me that they have already approved or are very close to approving Ambry.  I also believe that Ambry is already getting a huge amount of orders related to this product.  Worth noting that a previous thesis point was that it would be hard to replicate that test, as quoting from a previous VIC pitch, “proprietary unpublished data on 4,000 unique BRACA mutations took over 10 years to build”, but that isn’t playing out.  In fact, since most tests outside the US are done by others, I just don’t see that.   One reason the insurance companies are quick to approve is that they don’t like Myriad’s pricing, and in fact hate paying for it.  Just do a Google search to get a flavor, they are trying to get away from paying the high Myriad prices.

How this plays out:

In order to keep market share, myriad can lower price by 1/3, and reduce their profits to nearly zero.  However, I believe that Ambry would be open to taking market share, so I’m not sure if prices go even lower.  While that’s based on my read of Ambry’s personalities, this quote in an article from the CEO and majority owner also stood out (albeit on another test, not this one), “Dunlop has quietly dropped the price to $7,900, which is clearly below breakeven.   “If the reputation of your company is for raking every penny out of every rag, then you’re not going to be used,” says Dunlop. His attitude is this: “If we can cannibalize our own markets, then let’s do it. We’re applied scientists. Let’s not lose the goal. We don’t have a bunch of guys with financial calculators sitting over our heads, so let’s take advantage of that.”  Worth noting that another company, Gene By Gene, now offers the test for 2/3 lower cost, although I am not very familiar with them.  Gene by Gene claims to have done 1 million outside the US since starting in 2000 (vs. roughly150,000 per year done by Myriad in the US), so perhaps they also have a good test.

Summary:

Myriad makes 90% of profits from one test.  They have not yet seem revenue loss in the last quarter since the whole market saw a recent surge from Angelina Jolie.  However, the competition is much stronger that analysts realize, and in fact is already surging.  This is a big line item for the insurance companies (just Google search it) so they are aggressively looking to move providers.