Myriad Genetics (NASDAQ:MYGN) used to be the creme de la creme of the genetic testing industry. It had healthy profit margins, a growing business, and was well-known among investors and health professionals. But the party was busted up in 2015.
While the company’s technology platform was enabled by incredible advances in biotech, genomic tools have continued to get faster, better, and cheaper over time. That has given rise to formidable competition. And though not an existential threat on its own, the new competitors brought with them a business model completely opposite to that of the genetic testing pioneer. Turns out, the market really likes the new way of doing business.
The company has been racing to play catch-up — through acquisitions and new product expansions — and so far Wall Street is eating it up. Myriad Genetics stock is up 120% in 2017. However, investors that dig deeper will see signs that its high-growth days are over.
1. Running in place with acquisitions
Playing catch-up is very important. Why? Myriad Genetics’ bread-and-butter business has historically been hereditary cancer testing, which comprised 92% of total revenue in fiscal 2015. But the segment’s revenue dropped 11% from fiscal 2015 to fiscal 2017 and will likely continue to slide for the foreseeable future.
Management’s antidote has been to develop and offer various other tests, more in line with the offerings and business models of its competitors. That comes in two categories: 1. lower prices and more flexibility in the genes that can be evaluated per test, and 2. higher volumes of tests sold.
Myriad Genetics is executing this new direction through a combination of acquisitions and in-house development. It’s the right move, but it’s proving difficult. For instance, it acquired Assurex Health in August 2016 to get its hands on a neuroscience gene test called GeneSight. It provided $78 million in revenue in fiscal 2017 — its first year contributing — but that only barely made up for $70 million in annual revenue lost from the hereditary cancer testing segment compared to levels achieved in fiscal 2015.
The idea that the company has only been running in place in the last two years is clearly telegraphed when investors view long-term revenue trends.
GeneSight has significant long-term growth potential, so investors may only need to be patient. However, combined sales from the next two largest genetic tests offered by the company, VectraDA and Prolaris, plateaued in fiscal 2017 compared to the year-ago period — not an encouraging sign for efforts to diversify revenue.
It also hints GeneSight could have to do most of the heavy lifting to offset revenue lost elsewhere. With a purchase price of up to $351.6 million when potential milestone payments are factored in, and given what’s at stake, there isn’t a lot of room for error.
2. Platform expansion has proven expensive
Throwing money at acquisitions and marketing of new tests isn’t cheap. In fiscal 2017 the company’s selling, general, and administrative (SG&A) expenses grew 33% from the prior year, thanks largely to increased spending within the newly integrated Assurex Health business. SG&A expenses swelled from 47.6% of sales in fiscal 2016 to 61.8% of sales in fiscal 2017 as a result.
Expansion has proven expensive in a less obvious way, too. That’s because the margin on newer genetic tests — Vectra DA, Prolaris, GeneSight, and the like — is lower than what can be garnered from proprietary hereditary cancer testing. Cost of sales last year registered at 22.2% of sales. Still a respectable and healthy percentage, but one that has been creeping higher in recent years.
That means less revenue is trickling down to the bottom line as profit, which means more revenue will be needed to deliver the same total earnings in the future than has been obtained in historical periods.
3. Increased competition
The falling costs of DNA sequencing in the last several years alone has opened the floodgates of competition. Invitae (NYSE:NVTA), GeneDx, Counsyl, Ambry, and many other companies that didn’t even exist at the the turn of the decade have ripped increasingly large swaths of market share away from Myriad Genetics in recent years.
Invitae, which owned 10% market share for hereditary cancer testing at the beginning of 2017, has grown quickly. It processed 30,500 genetic tests in the second quarter of 2017, up from just 12,500 tests one year ago. Revenue is expected to fall between $55 million and $65 million this year, up from just $25 million in 2016 and only $8.4 million in 2015.
It’s important to note that competitors have faced some of the same problems as Myriad Genetics — namely, that growing sales of new tests and proving the industry’s new business model has been expensive. Invitae is on pace to post a net loss greater than $100 million for the second straight year, and has heavily diluted investors to keep pace with swelling expenses. Nonetheless, the industry pioneer now finds itself in a crowded room.
What does it mean for investors?
Myriad Genetics has mostly been running in place in its efforts to replace revenue lost from its once-formidable hereditary cancer testing business. Although it could be possible for GeneSight to carry the burden if given enough time, investors may need to get used to lower profit margins as the new normal. Genomics is now driven by high volumes of low-cost tests, not low volumes of proprietary (and therefore expensive) tests. The company is attempting to adapt, but investors can’t yet make any assumptions about how successful the pivot will be.