On Dec 23, we reaffirmed our long-term Neutral recommendation on Myriad Genetics Inc. (MYGN - Analyst Report) . Although solid quarterly results and efforts to revamp product portfolio have been encouraging, the company is plagued by uncertainties such as discontinuation of legacy products and the impact of the landmark Supreme Court ruling. The molecular diagnostic stock presently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
In the first quarter of fiscal 2013, Myriad reported earnings per share (EPS) of 68 cents in the first quarter of fiscal 2014, registering a 47.8% beat over the Zacks Consensus Estimate and excellent year-over-year growth of 88%. Revenues increased 51.7% year over year to $202.2 million, sailing past the Zacks Consensus Estimate of $168 million.
The higher-than-expected guidance for the current fiscal also boosts confidence. The commercialization of the unique myRisk test is another material upside as management expectations from the pan-cancer test are sky high.
Moving forward, we consider Myriad’s HRD test as a valuable asset for top-line growth as it has the potential to tap a widely unexplored market. The company’s increasing focus on the companion diagnostic market should work reasonably well to fuel growth. We look forward to the expansion of indications and derive comfort from the company’s plan to foray into the dermatology, autoimmune and neuroscience market in future, on the back of portfolio development.
However, the much-hyped Supreme Court ruling regarding legal claims that challenge Myriad’s patent landscape is out and it seems like a letdown for the company. Notably, in Jun 2013, a Supreme Court ruling had declared that isolated human genes are not patentable.
Following the decision, several companies have commenced offering clinical diagnostic and genomic laboratory services, including the testing and analysis of the BRCA1 and BRCA2 genes that compete with the BRACAnalysis testing and services of Myriad. Although Myriad has filed several patent infringement lawsuits against these companies, defeating these legal issues may create considerable trouble for the company going forward.
Moreover, the Centers for Medicare & Medicaid Services (CMS) recently proposed to pay $1,438 to Myriad for each BRACAnalysis test conducted by the company. The considerable reduction from the previously paid amount of $2,795 is expected to put a heavy burden on the company. Furthermore, European macroeconomic conditions might deter Myriad’s expansion plans in the near term.
Stocks to Consider
While we remain on the sidelines regarding Myriad at present, we are positive about Heska Corp. (HSKA - Snapshot Report) and InSite Vision Inc. carrying a Zacks Rank #1 (Strong Buy) and Affymetrix Inc. with a Zacks Rank #2 (Buy).