EUR 850.00 For Business Accounts Only

Morningstar | Despite Solid 1Q 2019 Results, Myriad Faces Headwinds in Reimbursement; Lowering FVE to $33.50

Myriad Genetics' fiscal 2019 is off to a bumpy start, with a couple of reimbursement obstacles that we expect will negatively affect the firm's results in the near term. Management lowered guidance by $25 million but maintained bottom-line guidance. These included headwinds with GeneSight, a diagnostic for depression and other mental health disorders, and with prenatal testing, which Myriad acquired with Counsyl in July 2018. While Myriad's narrow economic moat, underpinned by intangible assets and its intellectual property, remains intact, we are lowering our fair value estimate to $33.50 from $35 per share after adjusting for the aforementioned headwinds.

The firm's first-quarter revenue of $202 million hit the top end of management's guidance, and Myriad beat guidance on the bottom line. Organic growth of 2% was driven by growth in GeneSight, Prolaris, and EndoPredict, slightly offset by declines in hereditary cancer testing and Vectra. With pricing pressures in hereditary cancer testing finally stabilized, we expect sequential increases in the remaining quarters of fiscal 2019. Prolaris posted better-than expected sales, so we modestly increased our full-year expectations for the prostate cancer diagnostic. With 56% coverage for Prolaris after the quarter, we believe there is still significant upside left in that market and model double-digit growth in the near term.

We had previously expected publication of a GeneSight study in a peer-reviewed journal by this fiscal quarter, but management indicated a delay as the manuscript was withdrawn following the first journal's request for publication of GeneSight's proprietary algorithm. We had hoped the publication of these findings would bolster reimbursement by payers and Medicare, and this delay sets back our reimbursement expectations for GeneSight. Further, following the approval of 23AndMe's genetic test for depression, the U.S. Food and Drug Administration issued a warning against tests that are not backed up by clinical results, which emphasized the need for peer-reviewed publication and reimbursement from payers, as this would greatly legitimize Myriad's platform compared with competing tests. GeneSight posted 28% volume growth from last year, which indicates that awareness of its benefits could be increasing, but we note that reimbursement is crucial to moving the needle in this opportunity. Because we don't expect any significant reimbursement changes in the first half of fiscal 2019, we have decreased our full-year expectations for GeneSight sales.

Lastly, the prenatal testing products from Counsyl have hit a bump in the reimbursement road with UnitedHealthcare placing prenatal tests out of network. We estimate that this will have a significant impact on the year, barring any reversal in status. Although prenatal testing volume grew 16% from last year, we have adjusted our full-year expectations downward to account for the out-of-network status. This puts our full-year revenue estimates of $861 million near the midpoint of management guidance.