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Here's Why Myriad Genetics Dropped 19.2% in August

Maxx Chatsko, The Motley Fool

What happened

Shares of Myriad Genetics (NASDAQ: MYGN) fell more than 19% last month, according to data from S&P Global Market Intelligence. The stock shot out of the gate with a more than 50% gain after it quietly disclosed through a regulatory filing that UnitedHealthcare had agreed to cover the GeneSight Psychotropic test beginning in October. That marked the first major insurer to cover the test, arguably the most important in the company's portfolio, and caught Wall Street analysts off guard. Perhaps the genetic testing stock could reclaim the label of a promising growth stock after all.

But investors soon learned why the disclosure was made in an SEC filing and not in a press release. When Myriad Genetics reported fiscal fourth-quarter 2019 earnings in mid-August, it told investors that the U.S. Food and Drug Administration (FDA) was skeptical of claims made by the GeneSight Psychotropic test and demanded changes. Shares immediately gave up all of their gains for the month -- and then some.

A declining stock chart displaying on a tablet and an angry fist pounding the table.

Image source: Getty Images.

So what

The goal of the GeneSight Psychotropic test is to match patients with major depressive disorder or anxiety to medications based on certain genetic factors. The test costs $2,000 and didn't meet its primary endpoint in a major clinical trial, which is why Wall Street analysts soured on its market potential. That changed when UnitedHealthcare agreed to cover the test for members of its insurance plans, which had analysts scrambling to recalculate the product's potential in a total addressable market estimated at $10 billion.

That changed again when regulators raised eyebrows at how the test was being marketed. The FDA has issued a number of warnings to the marketers of diagnostic tests that "claim to predict a patient's response to specific medications" when the claims aren't supported by clinical evidence and haven't been reviewed by regulators.

Now what

Myriad Genetics told investors it has been working to address the FDA's concerns, but it has no guarantee regulators will accept the changes. Even if the GeneSight Psychotropic test gets the green light, clinicians may be wary of ordering a $2,000 with watered down claims and insurance companies may balk at covering it. Investors should proceed cautiously until the uncertainty clears up.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com