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Wells Fargo Initiates Coverage of Foundation Medicine, Myriad Genetics, Genomic Health

NEW YORK (GenomeWeb) – Wells Fargo Securities on Thursday initiated coverage of molecular diagnostics firms Foundation Medicine, Myriad Genetics, and Genomic Health, noting each firm has sustainable competitive advantages over the long term.

The investment bank gave Foundation Medicine an Outperform rating with a 12-month share price estimate in the range of $30 to $32 on a discounted cash flow basis, a method for valuing a company. Also, Wells Fargo initiated coverage of Myriad Genetics with a Market Perform rating and a share price in the range of $35 to $37 on a DCF basis, and initiated coverage of Genomic Health with a Market Perform rating with a share price in the range of $33 to $35 on a DCF basis.

In a report, analyst Tim Evans said that he made Foundation Medicine his top pick because he believes the firm "offers the most sustainable competitive advantage over a long period of time and also gives investors exposure to the trend toward increasingly complex panels."

The use of comprehensive cancer panels is one of the highest growth market segments in molecular diagnostics, he said, and one in which Cambridge, Mass.-based Foundation Medicine has a first-mover advantage. Evans estimated the addressable market at $3 billion and said that Foundation Medicine has no commercial competitor, and that only a handful of cancer centers offer assays that can identify four classes of genomic variations — substitutions, insertions/deletions, copy number alterations, and rearrangements.

The firm's first-mover status could create physician loyalty, "which tends to be sticky once physicians get comfortable with a certain product," he said, by use of its Interactive Cancer Explorer portal, which encourages the sharing of genomic and treatment data. Since the FoundationOne test launched in 2012, more than 2,100 physicians in more than 25 countries have ordered the test.  

He further noted that translating next-generation sequencing data into a clinically actionable report is a complicated endeavor and one that Foundation Medicine has achieved. "In effect, Foundation Medicine has made an incredibly complex process seem relatively simple and straightforward — not an easy feat, in our view," Evans wrote.

Lastly, he highlighted the company's biopharmaceutical customer base. Foundation Medicine's biopharma business grew by about 68 percent in 2014 and could grow by about 34 percent in 2015, Evans estimated. While its clinical business is already eclipsing that business, the biopharma segment does not face the same risks associated with reimbursements and provides a predictable source of revenues. 

In afternoon trading on the Nasdaq today, Foundation Medicine's shares rose 5 percent to $23.27.

In his note on Myriad Genetics, Evans said that the firm faces growth headwinds in its fiscal year 2015, which began on July 1, 2014, that could slow revenue growth to an estimated 3.5 percent, compared to 27 percent in FY 2014. However, revenues should reaccelerate by nearly 14 percent in FY 2016, driven by adoption of the company's Prolaris test for prostate cancer and Vectra DA test for rheumatoid arthritis, as well as its companion diagnostics business.

Further, while Myriad Genetics' hereditary testing revenues are expected to decline, the switch to the myRisk test, as well as the company's proprietary database, may shield it from pricing pressure and competition, Evans said.

He noted that the firm's database contains 16,000 curated mutations, compared to 5,000 in public databases, "which have no curations or quality control." While the quality gap will eventually close, that may not happen for five years, Evans said.

In June 2013, the US Supreme Court unanimously ruled that human genes are not patentable, but synthetic DNA, or cDNA, is patent eligible because it does not occur naturally, setting the stage for Quest Diagnostics, Laboratory Corporation of America, Ambry Genetics, InVitae, and others to offer their own BRCA1 and BRCA2 tests.

In spite of that, Myriad Genetics' share of the BRCA testing space remains high, about 90 percent, and as a result of the advantages offered by its database, "we believe that Myriad's share could remain stronger than consensus seems to assume," Evans said.

The Salt Lake City-based firm also has been moving away from reliance on its BRCA franchise, and Evans said that the share of the company's revenues from core hereditary franchise is expected to fall to 69 percent in FY 2017 from the current 93 percent, driven by Prolaris, Vectra DA, and companion diagnostic testing.

Myriad Genetics' shares on the Nasdaq were up 2 percent to $36.26 in late afternoon trading.

Lastly, coverage of Genomic Health was initiated with Evans saying that the Redwood City, Calif.-based cancer diagnostic firm has "substantial growth opportunities, particularly in prostate cancer and in international markets."

The US prostate market is anticipated to be about $625 million and the international market to be $2.5 billion, Evans said. That compares to total companywide revenues of approximately $280 million this year, of which $45 million were generated outside the US.

He added that Genomic Health has invested significant resources into validating its tests and demonstrating their clinical utility. As a result, Oncotype DX is now an accepted standard of care for invasive breast cancer in the US, "and we believe the growing body of data on other tests and indications will create similar tractions," Evans wrote. "It is time consuming and expensive to generate useful data, which we believe gives Genomic Health a strong (but not insurmountable) competitive advantage."

He also noted that the company, like others, is in the process of developing a non-invasive liquid biopsy technology with plans to launch a test in 2016.

The biggest risk for Genomic Health is uncertainty around reimbursement and competitive pressures. While Oncotype DX has been on the market for a decade, the firm "still must recognize over 25 percent of its revenues on cash-based accounting due to the extreme uncertainty around reimbursements," Evans said.

Medicare coverage of the company's prostate cancer test will be crucial, he said, adding he anticipates such action in the second half of 2015.

On the competition front, he noted NanoString's Prosigna Breast Cancer Prognostic Gene Signature Assay as a "disruptive threat, particularly should Prosigna win inclusion in cancer guidelines and receive Medicare reimbursement."

In prostate cancer, he said that he expects Genomic Health and Myriad Genetics to split the market, "but we acknowledge that potentially disruptive technologies exist."

Genomic Health's shares were nearly flat at $31.53 on the Nasdaq in late afternoon trading.