INITIATING COVERAGE REPORT
William C. Dunkelberg Owl Fund 22 March 2013
Myriad Genetics Inc.
Exchange: NASDAQ Ticker: MYGN BBGID: BBG000D9H9F1 Target Price:$33.24
Charles Paraboschi Lead Analyst
[email protected] Peter Blicharz Associate Analyst
[email protected] Robert Kost Associate Analyst
[email protected]RECOMMENDATION
MYGN Target Price Projected Return
BUY
$25.43 $33.24 30.7%
Market Data
52 week trading range Shares Outstanding ($mm) Market Capitalization ($mm) Enterprise Value ($mm) $22.02-$31.80 80.5 B 2.06 B 1.73 B
COMPANY OVERVIEW
Myriad Genetics Inc. (NASDAQ: MYGN) is a genomic sequencing company that researches the role human genetics play in disease, specifically cancer. This company provides the service of testing for hereditary diseases through molecular diagnostics. Myriad has provided diagnostic testing for breast, prostate, colon, pancreatic, ovarian, and uterine cancers and melanoma.
Financial Data ($M)
Cash & Equivalents Debt ($mm) 358.6M -
Revenue (mm)
700 600 500 400 300 200 100 0
Life Science Equipment and Services
INVESTMENT THESIS
In searching for the newest addition to the Owl Fund Healthcare sector, we wanted to pick a company that was distanced from the currently unpredictable environment that major healthcare has become. Also, we wanted to find a good company with little to no debt that is currently trading cheaply against its peers and its own history. MYGN fit these criteria. It has no debt, it has strong earnings growth (21.6% Y/Y), its earnings are currently trading at a 2.6% discount to its industry, and a 1.15% discount to where they have usually traded over the last two years. MYGNs strong earnings growth coupled with its current cheap price provide for an opportunity for the Owl Fund to see a return of (30.7%) from this investment.
Suit Against Myriad
On Nov. 30, 2013, Myriad Genetics reported that the Supreme Court granted certiorari to review an earlier case decided by a U.S. Court of Appeals regarding Myriad Genetics BRACAnalysis testing patents. Unfortunately, these tests are Myriads most profitable tests contributing to 74% of their total revenues. Oral arguments are set to begin on April 15th of this year, and the Supreme Court will deliver its decision on June 30th. The nine claims can be condensed into two questions on which the court will essentially have to decide upon, the first being if Isolated DNA is patent eligible and the second being if CDNA (DNA synthesized from messenger RNA) is patent eligible. Myriad maintains patent protection through 2018 on the majority of their tests, and if the case is decided against Myriad and some patent protection is lost, it will have virtually no effect on the companys revenues for two reasons. The first reason is because an adverse decision would only void any patent protection rights that Myriad enjoys on its BRACAnalysis tests, and would not affect the marketing or sales of the tests. The other reason is because although a patent loss would open Myriad to competition, Myriad is the only commercial provider of such specialized tests in the United States, and it would take time (5 years minimum) before any similar tests could be offered by competitors.
Earnings History
Earnings Date FY12 Q3 FY12 Q4 FY13 Q1 FY13 Q2 EPS 0.34 0.34 0.36 0.42 Revenue 129.8M 133.0M 133.4M 149.1M Price 12.99% 0.46% 13.38% 1.11%
Analyst Consensus Estimates
Earnings Date FY13 Q3 FY13 Q4 FY13 Q1 FY14 Q2 EPS 0.39 0.41 0.41 0.46 Revenue 148.35M 152.63M 147.50M 159.33M
Healthcare
All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports. Thus, investors should be aware of possible conflicts of interest that could affect the objectivity of this report.
MYRIAD GENETICS Spring 2013
Catalysts
High revenue and EPS growth. (Est. 17.6% and 21.16% respectively) Entry into the U.S. prostate cancer screening market with its new test Prolaris. Market size: $750million/year. Pipeline worth $7.2 Billion to enter market in next 11 years. Increasing penetration into current service markets. Launch of new Companion Diagnostics program initiated by the acquisition of Rules Based Medicine company. Initiation of expansion into Europe.
Drag Factors
CMS rate cuts on the reimbursement codes for genetic testing hurting revenue from BRACAnalysis. Increased SGA expense due to the rapid expansion of the company and higher commission takes because of larger orders. Medicare coverage approval process for new products. Lawsuit against Myriad by ACLU.
Peer Group Identification
Bio-Rad Laboratories, Inc. (BIO)
Bio-Rad Laboratories, Inc. is a manufacturer and distributor of life science research and clinical diagnostic products bioMrieux SA, designs, manufactures, and markets in vitro diagnostic systems Life Technologies Inc. both provides the service of genomic sequencing and sale of tabletop sequencing supplies
Target Price
To arrive at our relative value fair price we first gathered the P/E values for each of the companies in our comp group. We then calculated the mean of the comp group which came out to 21.47x. We then used MYGNs NTM EPS estimate of 1.69 to multiply the mean of the comp group to establish the implied price per share of $36.28. To achieve our target price, we used a growth analysis of the companys cash flow over the next eight years and discounted that cash flow back to the present to discern the appropriate value per share of $33.24. Peer Analysis Fair Value Price= $36.28 DCF Target Price= $33.24 Relative Target Multiple= 21.47x MYGN NTM EPS Est.= $1.69
Target Multiple Comp P/E 21.47 NTM EPS Est. Fair Value Price
bioMrieux SA Inc. (BIM)
Life Technologies Inc. (LIFE)
Ticker BIO BIM LIFE Average MYGN Fair Value Price
Price/EPS NTM EPS 20.8 5.36 17.3 5.67 26.3 4.37 21.47 5.13 17.80 1.69 $36.28
$1.69
$ 36.28
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MYRIAD GENETICS Spring 2013
FINANCIAL ANALYSIS
2Q13 EPS of $0.42; 2Q13 Revenue of $149.14M, both beating expectations FY13 EPS guidance raised to: $1.55 - $1.58 FY13 Revenue guidance raised to: $5.80M - $5.85M 2Q13 Revenue and EPS Q/Q growth was much higher than expected at 17.6% and 21.16% respectively
Revenues 2nd Quarter 2013 revenues were $149.14 million, up from $122.81 million in 2Q12, this was a 17.6% increase. Driving this revenue increase was the steady expansion of MYGNs flagship product BRACAnalysis. Sales from this product increased 9% Q/Q from 2012 to $110 million. Revenue from Myriad Genetics second largest product BART testing represented 10.6% of total revenue in Q2. This product was offered at the beginning of FY13 and delivered $15.8 million to the company. Revenue growth from Myriads third largest product, Colaris and Colaris AP tests increased 10% Q/Q to $15.8 million and representing 8.1% of total revenue in Q2.
Margin Analysis (refer to appendix for charts)
Myriad Genetics operates in a high margin industry. Because the company has so much patent and strives fulfills unmet medical need, it has strong pricing power. MYGN operates at high margins across the board and operates much more efficiently than its peers. Gross Margin: 86.9% Ebitda Margin: 38.2% Net Income Margin: 22.73% SG&A Margin: 41.62%
Although this company has healthy margins, we predict that there will be pressure on this companys margins into the next cou ple of years as it adjusts to its larger size and increased sales volume. Also putting pressure on margins will be the expansion into Europe as regulatory costs there for a diagnostic company tend to be higher than in the U.S. The primary margin to be affected will be the SG&A margin because of increased commissions to sales teams due to increasing demand for the companys services and higher order volumes. However, this margin pressure should not weigh to heavily on the companys bottom line and we project the Net Income Margin to remain where it usually trends.
Peer Margin Comparison (refer to appendix for charts)
The primary advantages this company has over its peers are its innovation in intellectual property and commitment to efficiency and quality of service. Because of these qualities, the company is able to price its testing products at a premium and maintain much higher margins than its peers. MYGN has better margins than its peers in every respect except for SG&A Margin. This margin is high for Myriad in comparison to its peers because it is still growing whereas its competitors have hit or are approaching their terminal size. Gross Margin: MYGN 86.9%; Peer Average 57.8% Ebitda Margin: MYGN 38.2%; Peer Average 24.4% Net Income Margin: MYGN 22.73%; Peer Average 9.36% SG&A Margin: MYGN 41.62%; Peer Average 28.94%
Balance Sheet Assessment
Myriads balance sheet is very healthy, with cash and short term investments consistently increasing since FY2008, only experiencing a decrease in 2011. Cash decreased to finance Myriads full cash acquisition of Rules Based Management (RBM) for $80 million, which has since proved accretive. Myriads accounts receivable has also increased appropriately with revenue growth over time, raising no concerns about payment issues. Myriad has aggressively been repurchasing common stock, which has increased their quality of their earnings. In their most recent quarter Myriad repurchased $33.7 million worth of common stock, representing 1.2 million shares. To date, Myriad has repurchased nearly a quarter of their outstanding stock, worth over $500 million and representing over 23 million shares at a weighted average price of $21.50 per share. In addition, at the end of Q2, Myriads Board of Directors authorized another $200 million in share repurchase to be executed at managements discretion.
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MYRIAD GENETICS Spring 2013
Revenue Growth:
Consolidated Revenue Growth for Myriad Genetics will continue between 9% and 12% through FY16. This growth projection is subject to drastic change after 2016 as the company will begin to see non-forecasted revenues from pipeline drugs hitting the market. Organic revenue growth will continue as MYGN expands its Companion Diagnostics segment and penetrates current markets deeper and expands overseas to Europe. Oncology: Representing about 60% of Q2 revenues, by the end of FY13 MYGNs Oncology segment is expected to have increased by 30% since FY11. Womens Health: Representing about 30% of Q2 revenues, by the end of FY13 MYGNs Womens Health segment is expected to have increased by 48% since FY11.
Revenue (mm)
700 600 500 400 300 200 100 0
2006200720082009201020112012 13E 14E
Segmented by Product:
BRACAnalysis test: The BRACAnalysis product line is actually comprised of two separate tests. These tests Isolate and analyze the BRAC1 and BRAC2 segments of a womans genetic code. Within these genes is information that can predict the chances of a woman getting breast cancer and ovarian cancer in the future. At the end of FY13, revenues from this product are expected to have grown by 27% since FY11.
Revenue Breakdown FY13 Q2
BRACAnalysis test COLARIS and COLARIS AP BART test Other
BART test: The BART test is similar to Companion BRACAnalysis test in that it uses the same genes to detect the possibilities of breast or ovarian cancer in a woman. This test will pick up on some signs that the BRACAnalysis missed and increase the accuracy of the diagnosis. Released in early FY 2013, this test was correlated to BRACAnalysis by 65%, meaning that 65% of the people who ordered the BART test ordered BRACAnalysis first. Although it was just launched, this product grew 20% from Q1 to Q2 in FY13. Growth is not expected to continue at this rate though because many of the tests in Q2 were done on already archived gene sequences that were prepped for the debut of the test. However because of its high accuracy driving demand, revenues from this test are expected to increase by 20% between FY13 and FY14. COLARIS and COLARIS AP: COLARIS and COLARIS AP are similar to the BRACAnalysis and BART tests in that the majority of people who order COLARIS AP have already had the COLARIS test done. These tests isolate several genes and analyze them to determine the likelihood of a person developing hereditary colorectal cancer and a womans likelihood of developing hereditary uterine cancer. Because of the increasing size of MYGN, we expect further penetration in this tests respective market leading to slow but steady growth. Companion Diagnostic Service: With MYGNs acquisition of Rules Based Medicine for $80 million cash, the company launched its companion diagnostics program. The objective of this program is to discover and synthesize novel biomarkers for large pharmaceutical and biotechnology partners using RBMs proprietary multiplex immunoassay technology. Since its purchase is FY11, RBM has become 100% incorporated into Myriad Genetics structure. Myriads first partner for this new business segment was Sanofi. In FY14 we project that revenue from this new segment of MYGN to have grown by nearly 81%.
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MYRIAD GENETICS Spring 2013
VALUATIONS Relative Multiple Comparison
The comparable group for Myriad Genetics consists of companies that operate primarily as genomic testing and sequencing providers. The companies used in the relative analysis were: Bio-Rad Laboratories, Inc. (NYSE:BIO), bioMrieux SA (ENXTPA:BIM), and Life Technologies Corporation (NasdaqGS:LIFE). The target Price to Earnings multiple in our comparable group is 21.46x and we strongly believe MYGN should be trading at or above this multiple. Using the 21.46x P/E and a $1.69 NTM EPS estimate for MYGN, we discerned a relative fair value price of $36.28.
Price to Earnings Multiple
Myriads Price to earnings ratio has on average over the past two years traded higher than both the S&P Life Science Tools and Services (S5LSTS) sector and its relative peer group average. As of Mid-February 2013, due to speculation about MYGNs upcoming court case and a negative reaction to a change to genomic testing reimbursement coding, MYGN is now trading below the ratio it usually trades against its comp group and industry, this ratio is usually 1.0 but is currently at about 0.89. Because revenue and EPS for MYGN are increasing at much faster rates than its competitors and relative sector, MYGN should be trading at a higher ratio against its Comp group and industry than it currently is.
EV/Ebitda Multiple
Myriads EV/Ebitda ratio has on average over the past two years traded higher than both the S&P Life Science Tools and Services (S5LSTS) sector and its relative peer group average. As of Mid-February 2013, due to speculation about MYGNs upcoming court case and a negative reaction to a change to genomic testing reimbursement coding, MYGN is now trading below the ratio it usually trades against its comp group and industry, this ratio against the S5LSTS is usually 0.85x but is currently at about 0.68x; and this ratio against its peer group is usually 1.1x but it is currently trading at .86x. Because Myriad Genetics size is increasing at a much faster rate than its peers, and is projected to be of bigger size and market share than the majority of its competitors in the industry, MYGN should be trading at a higher ratio against its comp group and industry than it currently is.
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MYRIAD GENETICS Spring 2013
Discounted Cash Flow
Within the DCF, there are several key assumptions. The first is the increase in the SG&A expense as a percent of revenue which we decided to project as increasing because of both management guidance, the rapidity at which this company is expanding, and its expansion into the European markets leasing to higher regulatory costs. The second key assumption our revenue projection rate. This rate varies from year to year and we combine a variety of methods to arrive at our projections. Utilizing recent quarterly data we projected the revenues using average Q/Q models, trend models, and growth trend models so we could accurately capture both the rapid growth rate of this company and the incorporate any seasonality that occurs. And the last key assumption in the DCF has to do with stock buy backs. MYGN authorized $200 million in buybacks to be executed at managements discretion and we incorporated the reduced measure of outstanding stock starting in FY15 and expensed the program primarily in 2014. We did this because the program was authorized for the second half of FY13 and the duration of FY14 meaning that the full reduction in outstanding stock would not be effective until FY15.
CAPM:
The discount rate used for the target price is 9.5%. This is the rate at the top of the scale used in the DCF. To get our discount rate we used the Capital Asset Pricing model with the risk free rate being the 10YR U.S. Treasury rate. We used the CAPM for determining the discount rate for this company because MYGN down not finance at all by debt and funds its operations strictly through cash flow and equity.
DISCLAIMER This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the authors opinions. The writer does not own any of the Myriad Genetics Inc. stock.
TUIA STATEMENT Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in real-world principles of economics and business, the Will iam C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Funds goals are threefold: Provide students with hands-on investment management experience Enable students to work in a team-based setting in consultation with investment professionals. Connect student participants with nationally recognized money managers and financial institutions
Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.
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MYRIAD GENETICS Spring 2013 APPENDIX:
Margin graphs:
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