Yahoo Finance Myriad Genetics Limps Into Fiscal 2020
Genetic testing company Myriad Genetics (NASDAQ: MYGN) has been tirelessly working on a short-term strategy to boost profitability called Elevate 2020, but investors are feeling pretty deflated as the company hobbles into its new fiscal year.
The business reported fiscal full-year 2019 operating results Tuesday and issued fiscal full-year 2020 guidance that both lagged behind expectations on Wall Street. Myriad also disclosed an update in its communications with the U.S. Food and Drug Administration regarding requested changes to the GeneSight Psychotropic test, which helps patients determine the most effective treatment for depression and is the company's most important growth product. Myriad discontinued two other testing options offered under the GeneSight umbrella in June due to a lack of clinical evidence.
Should investors be as worried as the recent stock price volatility suggests? Here's what you need to know about the latest results.
Image source: Getty Images.
Myriad Genetics: By the numbers
Myriad has done a solid job increasing the diversity of its product portfolio over the years to include more than hereditary cancer tests. Approximately 75% of total processed test volumes last year were products used to influence clinical decisions for individuals with rheumatoid arthritis (Vectra), early-stage breast cancer (EndoPredict), or prostate cancer (Prolaris), or who are pregnant.
The new diversity of products is also reflected in its income statement. The hereditary-cancer test segment generated 56% of total revenue last year, down from 72% in fiscal 2017. Total revenue jumped 14% in fiscal 2019 compared with the year-ago period. By comparison, revenue grew just 2% from 2017 to 2018.
Chasing top-line growth has been expensive, however, as demonstrated by a surge in operating expenses. Much of that can be chalked up to the costs associated with integrating prenatal testing leader Counsyl, which was acquired for nearly $406 million during the fiscal year. Nonetheless, the growth strategy has taken a big bite out of profitability.
Metric | Fiscal 2019 | Fiscal 2018 | Change (Decline) |
|---|---|---|---|
Total revenue | $851.1 million | $743.7 million | 14% |
Total costs and operating expenses | $843.5 million | $621.8 million | 35% |
Operating income | $7.6 million | $121.9 million | (94%) |
Net income | $4.4 million | $133.1 million | (97%) |
Adjusted earnings per share | $1.67 | $1.42 | 18% |
Data source: SEC filing.
According to estimates compiled by Yahoo! Finance, the average Wall Street analyst expected revenue of $857.6 million and adjusted EPS of $1.75. Investors generally shouldn't get too worked up over Wall Street expectations. That said, a closer look at the contributions from new products in the last three fiscal years reveals that the recent surge in revenue growth is unlikely to be sustainable.
Revenue Metric | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 |
|---|---|---|---|
Hereditary cancer testing | $479.7 million | $471.4 million | $525.5 million |
GeneSight | $112.6 million | $124.9 million | $78.4 million |
Prenatal | $104.9 million | N/A | N/A |
Vectra | $48.3 million | $55.2 million | $45.2 million |
All other genetic tests | $43.9 million | $38.9 million | $30.3 million |
Total genetic test revenue | $789.4 million | $690.4 million | $679.4 million |
Data source: SEC filing.
As that dissection of revenue (excluding service revenue) demonstrates, Myriad Genetics wouldn't have grown revenue without acquiring Counsyl and its prenatal tests -- an observation reinforced by full-year 2020 guidance.
Looking ahead
Wall Street may have been slightly disappointed by the actual operating results delivered in fiscal 2019, but it was furious over the full-year 2020 guidance issued by Myriad. Analysts were significantly overestimating the company's ability to continue on its growth trajectory. The mismatch resulted in shares falling nearly 43% the day earnings were announced.
Metric | Initial Guidance for Fiscal 2020 | Average Analyst Expectation | Actual Fiscal 2019 Results |
|---|---|---|---|
Revenue | $865 million to $875 million | $922 million | $851 million |
EPS | $0.55 to $0.65 | N/A | $0.06 |
Adjusted EPS | $1.80 to $1.90 | $1.92 | $1.42 |
Data sources: Myriad Genetics, Yahoo! Finance.
The drop in the share price wiped out all the gains achieved in early August when Myriad Genetics quietly disclosed through a regulatory filing that the GeneSight Psychotropic test, which matches individuals to depression treatments, would be covered by UnitedHealthcare. The news sent shares soaring nearly 60% as investors clamored over the idea that more major insurers would follow suit and help unlock the estimated $10 billion total addressable market.
The enthusiasm has waned as investors now know the likely reason for the quiet disclosure. Myriad quietly disclosed updates to its discussions with the FDA, which requested changes to the GeneSight Psychotropic test. Regulators are wary of diagnostic tests that "claim to predict a patient's response to specific medications" when the claims haven't been reviewed by the FDA and may not be supported by clinical evidence. The company submitted a proposed solution on Aug. 10, but cannot yet determine if regulators will accept the changes or if they'll have an impact on sales of the test.
It's worth pointing out that the recent UnitedHealthcare decision to cover the GeneSight Psychotropic test caught Wall Street off guard, in part because clinical studies failed to show a statistically significant advantage for the product. The lack of clinical evidence forced the business to discontinue two other GeneSight products, for analgesic and ADHD medications, in June. If the FDA brings down the hammer on more of the GeneSight portfolio or demands additional studies, then Myriad could struggle to earn additional coverage from major insurers.
A complicated situation
Investors interested in owning a piece of the genetic testing field may find it easier to look beyond Myriad Genetics. The business is still struggling to grow revenue without major acquisitions and appears to only be growing profits through accounting adjustments rather than actual performance. It also faces increased scrutiny from regulators for its most important growth product. As the company limps into its 2020 fiscal year, investors are right to question whether or not management's current strategy will yield success.
Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com
