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Morningstar | Near-Term Issues With Myriad's GeneSight Raise Questions on Execution; Lowering FVE to $32.50

Narrow-moat Myriad Genetics reported over $216 million in revenue for the second quarter of fiscal-year 2019, up 15% from last year, in line with previous guidance and mostly in line with our expectations. Although the GAAP earnings of $0.03 per share missed management's guidance by a penny, adjusted earnings were in line with guidance and our expectations. Both revenue and earnings missed consensus expectations slightly. After reports of continued hiccups with GeneSight, we're lowering our revenue expectations for the mental health diagnostic in the near term, resulting in a moderate decrease of our fair value estimate to $32.50 per share. Also, with GeneSight declines weighing on margins, we made some adjustments to our cost and operating spend assumptions for 2019.

Hereditary cancer testing, historically the company's area of core competency, returned to year-over-year growth (from restated numbers) and posted nearly $127 million in revenue for the quarter, up 9% sequentially. This quarter marked the fifth consecutive quarter of stable pricing in hereditary cancer testing and the eighth consecutive quarter of volume growth. Management did not break out Counsyl's contribution but noted that it was not material. Given that hereditary cancer testing was a small percentage of Counsyl's portfolio (less than 10% of revenue), we did not model a material impact. We expect Counsyl's main contribution to be in prenatal testing, which expanded in line with our expectations, posting over $31 million in revenue compared with about $18 million in the first quarter of fiscal 2019. The company's other key tests, Vectra, Prolaris, and EndoPredict grew in line with our expectations, posting 6%, 45%, and 10% growth, respectively.

Despite volume growth of 22% from last year, second quarter GeneSight revenue of $24 million represents a 24% decline year over year (18% decline sequentially). Management announced last quarter that issues with Medicare document requirements would be a headwind for the quarter, but in addition to this, the company announced that the quarter's revenue included a $4.2 million adjustment due to recently implemented laboratory benefit manager programs that adjusted the cash collection time frame upon which revenue could be recognized. Given Myriad's extensive experience with both Medicare reimbursement and laboratory benefit manager programs, these missteps give us less confidence in management's execution and our previous double-digit growth expectations throughout our explicit forecast. We've updated our fiscal 2019 outlook for GeneSight to negative single-digit growth from last year. Management indicated there would be a strong rebound in the second half of the year, but so far, GeneSight revenue in the first half of the year is down 12% from the first half of fiscal 2018. Management's vague commentary for the GeneSight 2019 outlook added to analysts' confusion on the conference call, and we were disappointed that management did not provide any announcements of new reimbursement decisions for the test this quarter. However, we note that the results from the GeneSight study were just recently published in the Journal for Psychiatric Research in early January (after a delay in 2018 with another journal), so we may see new reimbursement decisions with more time.