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Investment Thesis
Myriad Genetics (NASDAQ:MYGN) shares declined over 20% on Tuesday after the company reported third-quarter earnings and issued weak full-year guidance. The company reported a $156 million topline figure, down $11 million (6.5%) from last year, and an EPS loss of $0.43 per share, compared to an EPS gain of $0.31 per share a year ago. Management also lowered the upper range of full-year 2022 revenue guidance by $28 million, from a range of $670 – $700 million to a range of $668 – $672 million. The once-industry pioneer also expects higher operating expenses for FY 2022, mirroring continued material and wage inflationary pressures.
MYGN employs a conservative market approach relative to its peers, seeking to minimize losses while maintaining adequate capital expenditures. Nonetheless, profitability and growth paths still need to be clarified. All the while, I expect more alignment in the strategic positions of market participants as MYGN’s peers continue implementing a paradigm shift from “growth at all cost” to a more conservative strategy such as the one adopted by MYGN.
The previous article highlighted MYGN’s challenges and conveyed a clear message to stay away until a clearer path to growth and profitability manifests. In this piece, we iterate the hold rating, highlighting new insight conveyed in Q3 earnings results.
What is interesting is management’s disappointment in Hereditary Cancer and Tumor Profiling segment volumes, which rose 4% and 3%, respectively, indicating potential lost opportunity, most likely captured by its competitors. As MYGN was the first to release its Q3 earnings, this might be an indicator of favorable market performance for its peers, including Natera (NTRA) and Invitae (NVTA).
Revenue Trends
The most disappointing aspect of MYGN’s Q3 results was the revenue decline in its core business segments, consisting of its molecular diagnostic tests for Hereditary, Prenatal, Tumor profiling, and Pharmacogenomics, where all but one (Pharmacogenomics) showed sales declines. Hereditary segment sales were off by $9 million (11%) year-over-year despite a 4% increase in volumes, mirroring some pricing pressure as payers restrict access in an effort to control healthcare costs while competitors continue exerting pricing pressure. To understand these market dynamics, one needs to consider the two US Supreme Court rulings in 2012 and 2013, which invalidated BRCA gene patents (and, by default, all naturally-occurring DNA), and biomarker correlations used in detecting cancer risk, the gene testing service has become virtually a commodity.
Prenatal revenue was down $1.5 million (6%) year-over-year despite volumes remaining flat. The company cited the impact of California’s public prenatal screening program, which provides free screenings to pregnant women, stipulating that the gene testing service provider needs to be contracted with the State’s Center for Chronic Disease Prevention and Health Promotion “CCDP.” The program has been a source of contention between gene testing companies and the State. As I write this sentence, a news notification on my screen (Tuesday, November 1st) shows that a Federal Judge temporarily blocked the State from limiting program participants to its contracted network until the court can hear the case. If and when the program resumes, the impact will likely be more profound than that felt in Q3, given that the state-wide program only started in September (the last month of Q3) with limited impact on the remaining two months of the quarter; July and August.
Tumor profiling sales also declined 6% despite a 3% rise in volume. The company’s FDA-approved product, BRACAnalysis, is sold in Japan, exposing the segment to the strengthening US dollar during the period. The company cited a $3 million topline foreign currency headwind during the quarter. Still, while management stressed its test prices aren’t declining at the same pace as in previous years, the numbers show some price declines followed during the quarter.
Obviously, these results are pretty disappointing, and the only solace is the company’s pharmacogenetics segment, which increased by 37%, from $24 million to $33 million, driven by a 34% increase in testing volumes, primary its GenSight panel, the company’s psychiatric diagnostic test that allows personalized treatment for patients with neurological disorders. One can’t ignore the PRIME Care study, the largest Mental Health precision medicine study in US history, led and funded by the Department of Veteran Affairs and published in JAMA last July, demonstrating the exemplary performance of GeneSight. The company also attributed volume and sales increase to successful commercialization initiatives, including its unified ordering portal and convenient logistics ensuring patient privacy.
The company also scored another win, gaining a MyRisk CPT Code during the quarter, which should further help drive sales and earnings in the coming months, as this will allow patients and doctors access to genetic testing services with more reimbursement transparency. Nonetheless, I prefer to stay out of this trade until the numbers come out in the next quarter.
Financial Position
On a positive note, the company reported an operating cash flow near breakeven, thanks to stock-based compensation and deprecation adjustments, which accounted for 26% and 37% of net loss, respectively. Overall liquidity remains strong, with the company’s cash balance only slightly changed during the quarter ($193 million compared to $205 million in the 3rd quarter of last year)
The number of outstanding shares remained primarily flat compared to last year’s period. Capital expenditures were $18 million, a noticeable increase compared to the company’s average spending per quarter over the past few years, perhaps related to the company’s recent international expansion. Despite the divestment of its autoimmune segment, operating expenses increased by 5%, most notably, R&D expense, which increased by 10%. This excludes the acquisition of Gateway Genomics, which the company announced in a separate release today (Tuesday, November 1st)
Summary
MYGN reported weak results for the quarter due to weaker-than-expected sales and operating loss. I was most disappointed by lower sales in its core segments, namely its Tumor profiling, but also its hereditary cancer segments. Regulatory challenges are likely to continue casting a shadow over performance, despite the temporary halt of the CCDP prenatal screening program.
I believe we are in a new era in the gene testing market, with a paradigm shift from “growth at all costs” to reasonable, “profitable growth”. Despite higher operating expenses and the Gateway Genomics acquisition, I see Myriad is adopting a different shade of the same color. I don’t expect a significant deviation from the defensive market position it has maintained since losing its patent protections in the landmark US Supreme Court rulings in 2012 and 2013.
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