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Morningstar | Myriad's 4Q Meets Our Expectations, but 2019 Guidance Disappoints; Raising FVE to $35

Myriad Genetics' full-year and fourth-quarter results were both in line with our expectations, but management's fiscal 2019 guidance, after adjusting for the acquisition of Counsyl and accounting changes, was below our expectations. As we mentioned in our last note, narrow-moat Myriad's momentum in the last few months with reimbursement wins and new product gains is building the case for a stable moat trend compared with its current negative rating. However, we'd like to see this extend into fiscal 2019 before upgrading, and management's guidance adds to our hesitation. We are increasing our fair value estimate to $35 per share after adding in revenue contribution from Counsyl, adjusting for near-term guidance, and increasing our expectations for GeneSight given the positive results of clinical efficacy from this year's Guided study. With the stock trading in the territory of $48 per share as of Aug. 22, we believe shares are overvalued, with the market price missing the long-term impact of a competitive pricing environment in genetic testing as well as reimbursement hurdles.

Full-year revenue of $773 million was flat from last year's restated revenue, with 70% of genetic testing volume coming from new products, and double-digit growth from GeneSight, VectraDA, and Prolaris barely offsetting the 12% year-over-year decline in hereditary cancer testing, or HCT. HCT posted a low-single-digit sequential increase thanks to volume expansion, and we expect low-single-digit growth in HCT in fiscal 2019, excluding the impact of accounting changes. We also expect the pending approval of Pfizer's talazoparib in breast cancer to be a tailwind to the HCT business as Myriad's BRACAnalysis CDx is under priority review as the companion diagnostic. The U.S. Food and Drug Administration's decision is expected in December 2018.

In fiscal 2018, Myriad secured significant reimbursement for EndoPredict (about 90% covered) for breast cancer and Prolaris (55%) for prostate cancer, but we'd like to see more progress with VectraDA (40%) for rheumatoid arthritis and GeneSight (6%) for depression as these present underpenetrated market opportunities. Ultimately, we think the firm is taking the right steps to secure coverage, such as funding studies to prove the clinical efficacy and economic rationale for the products, and we expect these efforts to pay off in fiscal 2019, albeit slowly.

Fiscal 2019 guidance disappoints, as management expects only $885 million in revenue (midpoint), which includes Counsyl's contribution of $130 million. Myriad's first-quarter guidance of $201 million (midpoint) is flat from fourth-quarter revenue of $201 million, with Counsyl revenue and low-single-digit organic growth offsetting the impact of new revenue recognition standards and the closure of the German clinic. Full-year guidance of low-single-digit organic growth highlights that new products are only beginning to offset declines in the HCT and pharmaceutical services businesses, and more work is to be done in convincing payers and physicians. Further, full-year guidance assumes no Counsyl synergies, which we find surprising given the overlapping portfolios in women's health. With Counsyl's genetic testing products and the 30%-plus increase in salesforce from the acquisition, we had expected Myriad to be nimbler in navigating the integration and capturing cross-selling opportunities. In addition to keeping an eye on the Counsyl integration in fiscal 2019, we will be watching the company's use of cash. Notably in 2018, the company paid down significant debt, leaving $9.3 million in long-term debt left on the balance sheet compared with $99.1 million at the end of 2017.

Finally, we believe investors should note a few accounting changes relevant to future analysis. Myriad's fourth-quarter earnings release was delayed by a week, with management citing immaterial adjustments for the new revenue recognition standards (ASC-606) that needed review from fiscal 2015 through 2018. Further, investors should take care in comparing upcoming adjusted earnings as beginning in fiscal 2019, the firm's adjusted earnings will exclude stock-based compensation.