MYRIAD THINGS WENT RIGHT

“Better to be lucky than Good,”  as the saying goes.

Sometimes when it comes to scoring big with healthcare investing, you’ve got to be a little of both.

My return on investment in Myriad Genetics just soared above 60%…not bad at all considering that I only bought the stock in August of 2017!  But how real is this gain? It’s not uncommon for smallish to mid capitalization biotech stocks to spike in value only to crash the next month when scientific or sales results disappoint. Am I patting myself on the back today just to be disappointed tomorrow?

Let’s look at the evidence. According to YCharts, Myriad has had an average price to earnings ratio of 25 over the last five years. The stock currently has a Trailing Twelve Months Price to Earning Ratio of just 19.9, below the average PE ratio of 25 over the last 5 years. The Price to Earnings ratio for the Nasdaq market is over 21. So, even with the recent surge in share price, Myriad is valued below its historical average, and below the average of the Nasdaq index as a whole. No irrational exuberance here!

Is the company’s revenues and profits overly dependent on just one product? Can the FDA or insurers pull the rug out from under us tomorrow and cause our blooming share price to wither?  Not really. According to a presentation published by management in March of 2018, the company’s largest revenue segment, hereditary cancer testing, only accounted for 33% of revenue. The other 67% of revenue was earned by 4 different tests. Hereditary Cancer, once Myriad’s only claim to fame, is still a critical revenue source for the company, but management’s strenuous efforts at diversification have really started to pay off.

What about management turmoil?  Is it possible that a key player will leave, or that a sudden executive exodus will leave the company rudderless? According to Marketwatch, the CEO, COO, and CIO, are only 55, 59, and 48 years old, respectively, and have an average tenure at the company of a decade or more. So, no succession crisis or retirement  threatens management continuity, and the same team has been guiding the company strategy consistently for many years. In a biotech world where many strategies are hurt by “here today, gone tomorrow” scenarios, Myriad has steady hands at the wheel.

So, how reliable is my 60% gain?  About as reliable as a smallish, nasdaq traded innovation company can ever be. Let’s face it, somehow I really scored with my Myriad investment. How did I get here?

Well, let’s start with the “Good” part.  I had a bit of an advantage because of my work history in the diagnostic business. While I knew that “also ran” national labs such as Bioreference have had a very hard time competing because they mostly try to compete with Quest and Labcorp selling generic, commoditized medical tests, I also knew that a sub niche of specialized laboratories existed that sell proprietary, or patent protected tests.

The problem with Myriad was that their “Golden Goose” had just expired. In the early to mid 2000’s, Myriad had become a media darling by producing a well validated test on the cutting edge of the “personalized medicine” revolution. The Braca Gene mutation test was one of the first tests to detect a rare, but extremely dangerous gene mutation that indicated a very high percentage chance of aggressive breast cancer in a woman. Myriad was one of the first business organizations to offer a scientifically validated glimpse into the healthcare crystal ball for American women. Over time, the test became so trusted that celebrities such as Angelina Jolie chose to have preventative double mastectomies based on the results.

But patents only last for so long. And by the summer of 2017, Myriad’s share price had plummeted from $43 to $19 on generic competition that had entered the market once patent exclusivity had exprired for the BRCA gene test. Was this the end of the road for Myriad? Were they a one trick pony, unable to provide other innovative tests that the American Medical Community would grow to trust?

I analyzed the following factors and decided to take a gamble on a beat down stock.

-An entrenched, relatively youthful management team that had a lot to lose. CEO Mark C Capone had been with the company since 2002, and owned some 700,000 plus shares that had fallen in aggregate value from $30,100,000 to $13,300,000 in less than 18 months. A long tenured senior management team that collectively owned $121,600,000 worth of stock that had plummeted in value. This team had demonstrated superb executive chemistry and team work over the years, and had a lot to lose if they couldn’t revive Myriad’s fortunes.

-A robust, if declining cash flow. Even in 2017, Myriad’s “year from hell,” the company still generated $100,000,000 in free cash flow, on revenue of $771,000,000. That is one hell of a profitable company.

-A pristine balance sheet. It turns out that even during the “flying high years” of Angelina Jolie praising their test and being the only validated game in town, Myriad’ management team had been financially conservative, and the company had only $90,000,000 in long term debt on the books against assets of over $1,000,000,000.  If this team found the right technology to buy, they still had ample resources to invest.

-I liked the acquisitions that the company had made. Forseeing the imminent expiration of their BRCA gene test exclusivity, the company had invested in a new test called Gene Site. This test had already been on the market for a few years and would help both general practitioners and psychiatrists treat depression. The clinical concept was to leverage genetic testing to help determine which depression medicines would work for which patients. If you have ever had people in your life who have been forced to seek medical treatment for depression, then you know that the science is still far from ideal, and many patients suffer through an agonizing trial and error process. Gene site certainly represented a market that could be just as big, or much bigger than BRCA Gene testing. But the science was still not totally proven, and there were a lot of questions about whether the medical community would embrace the Gene Site test the same way that the BRCA gene test had been embraced. It seemed promising, if still risky.

So I took a shot. Myriad certainly had all the right pieces in place to mount a comeback. But the best poker player still needs luck. I got my lucky strike! Here is what went right.

-Revenue and profit from Myriad’s legacy testing business never decline as badly as analysts thought it would. It turns out that cancer testing is all about trust and physician habit. In other words, if you regularly drink Coca Cola, but someone offers your Kirkland brand cola from Costco for less, you may very well buy the Costco Cola because you know that no one will die if the knock off product turns out to be inferior. However, if Angelina Jolie is going to have her breasts amputated in a desperate pre-emptive strike on cancer, she wants to use the testing company that her physician knows and trusts. It turns out that Myriad’s decades of clinical experience in Oncology is still valued by the market.

-The story around Genesite just continues to get better, and the medical community has begun to embrace the test. I knew from a combination of research and personal experience that the test had potential. But sometimes these things take off, sometimes they don’t. In Myriad’s latest quarter, Genesight brought in $30,000,000 in revenue, up 27% from the same quarter in 2017. Even without major clinical milestones, the superior resources and know how that Myriad brought to the table after the acquisition of Assurex have driven results. In May, 2018, brand new data was presented to the American Psychiatric Association in the “gold standard” format that the medical community craves; a randomized, controlled clinical trial with a large set of trial patients. The results were very positive, and most analysts expect these positive clinical results to drive Genesight’s adoption in the $10,000,000,000 market for depression treatment in America. Currently Genesight has realized less than 5% of its market potential, which helps explain the recent surge in stock price.

-Along with positive Genesight results, the company has come out with a raft of solid results on a wide variety of tests both in its traditional hereditary cancer realm of expertise, and in “pioneer” fields such as rheumatoid arthritis, and prostate cancer. When I chose to invest, did I know that the company had a lot of “iron’s in the fire?”  Yes. Did I know how many would produce convincing data that would provide strong ammunition for Myriad’s sales force? No.

I just got lucky in this department.

-All of the above mentioned “lucky strikes” were enough to lift the share price from the low’s it had hit when I first decided to invest. However, the most recent bonanza has been management’s decision to purchase Counsyl genetics, a provider of women’s health testing. The market has loved this deal. Since the purchase was announced, Myriad’s share price has surged an additional 30%. Not a bad gain over just 60 days!  In a lot of ways the deal makes perfect commercial sense; Counsyl, much like Myriad, is a provider of highly specialized, innovation oriented, testing for women’s health. The “good” part of the equation is that I chose to invest in a company with the financial resources and established management to make this kind of deal happen. The “lucky” part is that Counsyl was for sale, and that the Market liked the deal. As investment legends such as Warren Buffet have often noted, “Mr. Market” can sometimes act like a child or a maniac that has forgotten to take his medicine. In this case, the winds of good fortune have blown my way.

             Is Myriad a buy at its current price? That’s hard to say. The Market has recognized the enormous long term potential that Mr. Capone and team have established. It is no longer a bargain basement stock. On the other hand, most of Myriad’s new tests have only achieved 5% or less of the total addressable market. If you are a deep value investor, you may need to go through a similar “analyze and pray” process that I went through to find the next Myriad. However, if, like Buffet, you believe it’s “better to pay a fair price for a great business, rather than pay a great price for a fair business,” then I would invite you to become a fellow Myriad shareholder.  We predict that our predictive testing business has a bright future indeed!