Myriad Genetics: Is The Clerk Giving You A Buying Opportunity?

Myriad Genetics (MYGN) is an interesting story. The company is a molecular diagnostics provider, focusing on selling diagnostic tests including:

• myRisk. Tests for hereditary cancers including breast, colorectal, ovarian, endometrial, pancreatic, prostate, gastric and melanoma;


• BRACAnalysis. Test for hereditary breast and ovarian cancer;


• COLARIS. Tests for hereditary colorectal and uterine cancer;


• COLARIS AP. Tests for hereditary colorectal cancer;


• MELARIS. Tests for hereditary melanoma;


• PANEXIA. Tests for for pancreatic cancer;


• PREZEON. Tests to assess PTEN status for disease progression and drug response;


• Prolaris. Tests for prostate cancer;


• Theraguide. Tests for chemotherapy toxicity to 5-FU;


• BART. Tests for detecting large genomic rearrangements involved in hereditary breast and ovarian cancer.

Of these, BRACAnalysis is the largest revenue contributor by far. It represented 74% of MYGN's revenues in the latest quarter, as can be seen below (Source: 10-Q).

(click to enlarge)

Fundamentals and valuation

MYGN has been very successful in growing a profitable business. Revenues grew at 51% year-on-year in the latest quarter. This growth is expected to slow down meaningfully in the near term, to 18.1% in the December quarter, but to still remain significant.

This revenue growth has been accompanied with very high margins. ROE stands at 26% in spite of there being decent equity as shown by the price/book at 2.9 times. Operating margin is high at 38.6%.

All this profitability translates into MYGN trading for a cheap 12.6 times projected FY2014 earnings. MYGN also trades for just 6.6 times EV/EBITDA which is extraordinarily low for such a growing and profitable company in the Bernanke-infused market.

Bearish thesis

So why is MYGN so cheap in the land of bubble growth companies? Evidently there's a significant bearish thesis against. Indeed, a two-pronged bearish thesis. It goes like this:

• First, due to a recent Supreme Court ruling, its main product might be exposed to more - and cheaper - competition. This part of the bearish thesis seems likely to be true;


• Second, and here things get interesting, recently MYGN was punished because the Centers for Medicare & Medicaid Services (CMS) proposed to pay $1,438 for each BRACAnalysis test. This is down from $2,795 previously and would represent a halving of the payment.

Naturally, the CMS change had the stronger near-term impact, leading to a quick 10% drop over the last few days.

The clerk

I said things get interesting because it's actually not the first time the CMS seems to propose to slash payment for the BRACAnalysis test. It happened before, with similar values. And the interesting thing was that it was a clerical error! The company addressed it in an 8-K.

On September 30, 2013 the Centers for Medicare & Medicaid Services released finalized pricing for the new molecular pathology codes for 2014 and beyond. As expected, CPT code 81211 (BRCA1 & BRCA2 full sequence) and CPT code 81213 (BART large rearrangements) were priced at $2,795.09 and $587.12 respectively, which was identical to the initial median pricing submitted by the Medicare Administrative Contractors. This will be the finalized Medicare pricing reflected in the 2014 Clinical Laboratory Fee Schedule.

CMS also posted the molecular pathology codes for the remaining three months of 2013. Unfortunately, Noridian Healthcare Solutions LLC (the Medicare contractor for Utah) and Palmetto GBA made a clerical error in their pricing for CPT code 81211 (BRCA1 & BRCA2 full sequence). This error was confirmed by Myriad in a telephone call to both Noridian and Palmetto this afternoon. During the call, Noridian informed Myriad that it will contact CMS and immediately correct the pricing for CPT code 81211 to $2,795.09. We believe that it may take a week or two for this correction to be reflected by CMS.

It seems possible that the same error took place again. Either way, the resolution of this matter will hold MYGN stock hostage. Either it is an error and MYGN will trade up as soon as it's cleared up, or it isn't an error and MYGN is likely to trade lower since this would hit 74% of its revenues with an halving of payments.

Conclusion

MYGN seems a very decent company with strong growth and very low valuation, especially taking into account its high profitability. However, there are increased competition fears, and most interestingly, the chance that a clerical error affected the proposed payment for MYGN's largest product.

This clerical error has taken place before, and might have been repeated. The stock will be dependent on whether the payment proposal is in error again or a halving of CMS payments is confirmed. MYGN was quick to point out the error back in October but has remained silent this time, which is somewhat worrying.

Source: Myriad Genetics: Is The Clerk Giving You A Buying Opportunity?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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