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Myriad Reiterated Neutral

Zacks Equity Research

We have reaffirmed our Neutral recommendation on Myriad Genetics (MYGN) following its third quarter fiscal 2012 results. Based on a strong quarter, the company raised its guidance for the current fiscal for the second time in the year.

Myriad reported a strong third quarter with both revenues and EPS going past the Zacks Consensus Estimates. The company’s flagship product, Bracanalysis, has been recording robust growth over the past few quarters on the back of increasing penetration in both Oncology and Women’s Health markets.

The company’s continuous focus on penetrating the segments of ovarian cancer, carcinoma in situ and triple negative breast cancer indications have increased the addressable oncology market for Bracanalysis by $200 million to an annual market potential of $650 million. Revenues from these three indications grew 57% during the reported quarter. To further expand in the Women’s Health market, Myriad is looking at growing same-store sales (24% year-over-year growth), addition of new territories (up 31%) and implementation of interactive media campaigns. Besides, significant growth opportunity lies in the Women’s Health market for Bracanalysis due to the low penetration level (7%).

We are encouraged with Myriad’s expansion plan in Europe that continues to remain ahead of schedule with a goal to record $15 million of revenues from international operations by fiscal 2016. The company’s laboratory in Munich, Germany is operational since January and is capable of generating $50 million in revenues each year within the next five years. With its headquarters in Switzerland, hiring of country managers for the five major markets of Germany, France, Italy, Spain and Switzerland have been done. While reimbursement for Bracanalysis, Colaris and Colaris AP have already been received in these markets, Myriad is working to receive reimbursement for Prolaris. The Prolaris clinical program is running ahead of schedule and the company is in talks with large institutions in France and Australia to initiate additional validation studies later this year.

Meanwhile, due to the company’s focus on international expansion and pipeline development, expenses are on the rise. With R&D expenses touching 9% of the total revenue level in 2012 (from 7% in 2011), margins will come under pressure. This is reflected in the decline in operating margin during the reported quarter. Moreover, the competitive landscape is quite tough with the presence of players such as Cepheid (CPHD) and Genomic Health (GHDX).

Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.

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