Myriad MYGN
July 12, 2010 - 9:43am EST by
JackBlack
2010 2011
Price: 15.00 EPS $1.55 $1.66
Shares Out. (in M): 100 P/E 10.0x 9.0x
Market Cap (in $M): 1,500 P/FCF 9.0x 8.0x
Net Debt (in $M): -500 EBIT 150 171
TEV ($): 1,000 TEV/EBIT 6.6x 5.9x

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Description

 

Overview

Myriad Genetics is a leader in molecular diagnostic testing.  Company markets 8 diagnostic tests, but the BRACA test is the key product and represents about 80% of revenue.  Company has a 300 person sales force in the US and is primarily focused in the US market.  Company is based in Salt Lake City and was founded in 1991

The BRACA test assesses a woman's risk of developing breast or ovarian cancer based on whether she carries a mutation in the BRACA gene.  The BRACA test was introduced 15 years ago and accepted to be the standard of care for high risk patients (positive family history etc).  Patients who are tested positive have over a 10 fold increased risk in developing breast or ovarian cancer.

There are appropriate preventive therapies that could be offered to positive BRACA patients that will reduce their cancer risk by 50% or more.  There are two key markets for BRACA: 1) patients diagnosed with breast cancer that should be tested to help guide therapy e.g., lumpectomy vs bilateral mastectomy.  This is a $600M market that's about 50% penetrated, and 2) patients that are BRACA carriers but have not been diagnosed of breast cancer.  This is a $6B opportunity but it's only 2% penetrated.  The company is focusing on the OB/GYN market to drive revenue growth

On June 30th, 2009, company spun out the biotech part of the company into Myriad Pharmaceuticals (MYRX).  MYRX was focusing on developing drugs for cancer and was burning about $50M a year, down from a peak of $100M.         

•1)      Investment Thesis

  • Spinout of non-profitable biotech business and reinvesting in the molecular business will improve return on invested capital significantly
  • a) Instead of investing in high risk drug development projects, company is investing in high return diagnostic business that has a much higher certainty on return on investment
  • b) R&D spend decreased from $140M in F2008 to an estimated $25M in F2010
  • c) Investments in sales force and DTC advertising will allow company to further penetrate the $6B OB/GYN market to drive long term growth.

 

  • Leading market position with no competition currently and significant barrier to entry long term. 
  • a) Company's BRACA product is protected by 23 patents with key patents expiring in 2018
  • b) Proprietary unpublished data on 4,000 unique BRACA mutations took over 10 years to build and provide significant barrier to entry beyond patent protection
  • c) Lack of competition offers company pricing power at $3000 per test with biannual price increase. Because the high predictability of cancer risk, BRACA is considered to be cost effective by payers. Myriad has 96% insurance coverage with average copay of $100

 

  • Molecular diagnostic is a high margin and very low capital intensity business
  • a) Company sequences the BRACA gene from blood or mouth wash samples and sends the report back to the physicians. Requirement for capex or working capital is very low. Capex is only $10M a year for a $350M business.
  • b) Gross margin is about 90% with operating margin in the 37% that could increase to high 40s in the next 3 years. Very high incremental margin with low variable cost
  • c) ROIC is around 50% and increasing

 

  • Potential for special dividend, recurring dividend or share buyback
  • a) Company has a strong balance sheet with $450M in cash and generating over $110M of FCF a year.
  • b) Management announced a $100M share repurchase program couple weeks ago. Company may also start a recurring dividend due to strong cash flow generation

•2)      Key Value Drivers

  • Expansion into ob/gyn market driving revenue growth
  • Overturn of the district court decision by the Court of Appeals relating to the ACLU litigation
  • Potential announcement of dividend and further share repurchase

 

•3)      Key Risks

  • Company is unsuccessful in penetrating the OB/GYN market and oncology market penetration starts to plateau
  • Unfavorable ruling by the Court of Appeals against Myriad
  • Company would like to enter the European market.  Risk of overpaying for an European asset

 

•4)      Valuation

  • 2013 price target is $25.70 applying 10% cap rate on 2014 RICF.  Downside is $15 applying a 13% cap rate assuming no growth and company burns $275M cash on a low return European deal

 

•5)      Update

  • Bilski ruling by Supreme Court
    • Machine and transformation not the only tests to determine whether an invention is patentable. 
    • Strengthens MYGN's patents
    • Bodes well for upcoming ACLU patent appeal.  Ruling in 12-18 months.  Even if MYGN loses the appeal which is unlikely, company still has 16 unchallenged patents that will block competition from entering the market at least till 2018 and possibly 2023

Catalyst

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