Shares of Myriad Genetics (MYGN) spiked higher yesterday to hit their highest levels on record since mid-2009, as seen in a stock chart. The move came in the wake of the New York Times op-ed by actress and general purpose celebrity Angelina Jolie that she opted for a double mastectomy after a blood test revealed that a “faulty” BRCA1 gene gave her a high probability of developing breast cancer.
Jolie didn’t mention Myriad by name – she didn’t have to. The company has taken out a patent on the gene – which it spent millions of research dollars to identify – and now is able to recoup that investment and earn a return on it by being the sole company authorized to test whether those like Jolie have BRCA1 or BRCA2 mutations tied to a greater risk of breast cancer.
The buzz that has surrounded Myriad in the wake of Jolie’s revelations thus offers investors both an enticing opportunity – and a heightened degree of long-term risk. That has been reflected in its stock price, which climbed about 4% on Tuesday in response to the initial news, only to lose about 1% in morning trading on Wednesday. It’s hard to imagine that Jolie’s public discussion of the availability and value of genetic testing won’t fuel demand for the BRACAnalysis tests by those with a family history of breast and other cancers. On the other hand, the debate that has followed the publication of the op-ed has included many reminders of the high cost of these tests and the fact that even for some of those with insurance plans, deductibles may still feel prohibitively high for a test that a doctor or insurance company may not deem to be essential.
Considerations such as that are likely to emerge as intangible yet significant ones for investors in Myriad, whose net income and revenues have been growing at a very healthy clip, in spite of a slight dip in the rate of growth for revenues. Equally impressive is the fact that while its research and development costs also are growing, it is at a similar rate to both profits and revenues.
But those revenues are under siege. In April, U.S. Supreme Court justices heard arguments on the part of the Association for Molecular Pathology, which is challenging the company’s right to patent a gene that occurs naturally in the human body. For its part, the company says the patent applies not to the gene itself but to DNA molecules and processes. While a federal court specializing in patent law has twice ruled in favor of Myriad, the Supreme Court (in spite of the recent unanimous ruling on Monsanto (MON) seed patents) has taken a more nuanced approach. Add to this risk the prospect of prices for the BRACAnalysis and Myriad’s other proprietary tests coming under pressure in the new Obamacare regime, and you have a reason to be cautious about where the company’s profit margins and revenues are headed.
The PE ratio, at about 21 based on trailing earnings, doesn't seem particularly high for a company showing revenue growth in the 20% range.
Much of the source of the market’s recent excitement is of a kind that isn’t enduring. In other words, it’s because of a celebrity’s implicit endorsement rather than based on the company’s fundamentals. Nonetheless, those fundamentals are strong enough to warrant owning the stock, and even adding to positions in any selloff. Some bulls suggest that even if some of the patents are struck down, the company will be able to maintain a de facto dominance of the BRCA testing methodology – in other words, that its competitive moat will remain wide enough to resist attempts by competitors to challenge its dominance.
Meanwhile, Myriad is expanding its roster of cancer tests to include prostate and colon cancer and it is planning to diversify into other cancers that have elements of hereditary (and thus genetic) risk, such as some forms of melanoma. While per-test prices for the BRACAnalysis are high, at about $3,000, the company’s growth has come from increased volume. That is encouraging: relying on the ability to boost prices in a healthcare system that is likely to increasingly focus on constraining costs is likely to prove counterproductive, especially as demand for the tests in question is only likely to increase.
With at least one source of anxiety out of the way – the company reported better-than-expected increases in both revenues and earnings for the first quarter earlier this month – investors are free to focus on the tradeoff between the risk of an adverse court ruling and the long-term potential of Myriad’s growing range of products. Unless you are convinced that the Supreme Court is likely to rule against Myriad, and that such a ruling will mean an abrupt end to its competitive advantage and its business, this could be a stock to acquire once its price recovers from its brush with celebrity.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
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