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Goldman Analyst Says Myriad's Stock Buyback Strategy Suggests Slowing Organic Growth

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By Turna Ray

During hard economic times, what does a diagnostic company do when it is unable to grow shareholder value through increased test sales and the introduction of new products? One strategy, as recently exercised by Myriad Genetics, is to repurchase a portion of its stocks.

Following the recent announcement that Myriad plans to buy back $100 million worth of common stock — its third such purchase in less than 12 months — Goldman Sachs analyst Isaac Ro issued a note stating that the repurchase "is reflective of slowing organic growth and increasing dependence on financial engineering to drive bottom-line growth."

According to Myriad, $50 million of the $100 million repurchase will be part of an accelerated share repurchase program with JP Morgan. Repurchase of the remaining half is expected to be completed by the end of December.

The latest purchase follows two $100 million buybacks in May and August of 2010. According to Goldman, at the start of the third quarter, Myriad had $38 million remaining under the last repurchase program.

These stock buyback schemes occur as investors are increasingly wondering whether the growth of Myriad's flagship product, BRACAnalysis, has plateaued. During recent earnings calls, investors have remarked that the breast and ovarian cancer susceptibility test cannot remain the company's primary growth driver and that Myriad should accelerate adoption of the other molecular cancer diagnostics in its portfolio.

The BRACAnalysis test for assessing women's hereditary risk of breast cancer represents 88 percent of Myriad's total sales. "We believe [Myriad's] mature BRACAnalysis franchise faces decelerating growth and see long-term risk to the company’s pricing structure," Ro wrote in a research report released in February, when Goldman Sachs began covering Myriad along with five other diagnostics firms. Characterizing Myriad as a company that has "single-product risk," through BRACAnalysis, Goldman gave it a "sell" rating.

In recent months, Myriad has made moves to garner new revenue sources by inking companion diagnostics development deals with drug companies, expanding into the European market, and adding a new genetic test that gauges risk of hereditary pancreatic cancer. However, in the short term, there are few signs to suggest that the company will be able to dilute its revenue dependency on BRACAnalysis from these other efforts.

Despite concerns about slowing growth, Myriad reported an 8 percent increase in revenues for its most recent quarter, which it credited to BRACAnalysis sales. Myriad believes that it has plenty of room to grow BRACAnalysis adoption among primary care doctors and OB-GYNs. However, counter to this, many insurers have issued prior authorization schemes for BRACAnalysis believing that too many women who don’t meet testing guidelines are receiving this test.

For the three months ended Dec. 31, 2010, Myriad's total revenues rose to $100.4 million from $92.8 million in the prior-year quarter, beating consensus Wall Street estimates of $98.9 million.

BRACAnalysis sales, meantime, rose nearly 9 percent year over year to $89.2 million, while revenues for its Colaris colorectal cancer test were nearly flat at $7 million and revenues for its six other products increased around 14 percent to $4.3 million.

Although Myriad's finances appear to be strong, the company's involvement in a high-profile anti-gene patenting lawsuit is another source of market uncertainty for the company. On April 4, the Federal Circuit Court of Appeals will hear arguments in Association for Molecular Pathology et al. vs. the United States Patent and Trademark Office et al. Last year, a federal district court invalidated several of Myriad's patents related to the BRACAnalysis test and the company is appealing the decision (PGx Reporter 03/31/10).

Myriad has stated that since the court case is only challenging the merit of seven patents, a fraction of its BRCA IP portfolio, the test's revenues won't be substantially impacted. However, given the broad impact the lawsuit can have on gene patenting for the broader drug and diagnostics industry, the true impact of this case on Myriad and other businesses remains largely unknown.

"Our diligence suggests the Department of Justice and the [USPTO] remain at odds on the issue of gene patents, making it difficult to handicap the likely outcome," Ro wrote in his note regarding Myriad's latest stock repurchase.

The DoJ issued an amicus brief in the appeals case, taking a middle ground on gene patenting by agreeing with the lower court that merely isolating a DNA strand from its natural state is not an invention that can be patented. But the DoJ departed from the district court in stating that Myriad's patent claims directed "solely to cDNAs" are valid (PGx Reporter 11/03/10).

Goldman believes that this case will continue to impact Myriad's stock for at least another year if it escalates to the Supreme Court. "We believe consensus is discounting a reversal in favor of MYGN with escalation to the Supreme Court possible in calendar 2012," Ro wrote in his note.

Events that would change Goldman's outlook on Myriad are: "better-than-expected BRACAnalysis penetration, favorable patent litigation results, resurgence in patient testing volumes, and better-than-expected growth in new tests," Ro wrote, adding that "we would be more constructive if capital deployment were to help diversify the business."


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