Following the release of the disappointing third quarter fiscal 2010 results on May 4, 2010, most of the analysts covering Myriad Genetics, Inc. (MYGN) have made downward revisions to their 2010 and 2011 annual estimates.
The company performed unimpressively in the quarter, falling short of the Zacks Consensus Estimate as well as the year-ago earnings by 5 cents. We have downgraded the stock to Underperform from Neutral subsequent to the earnings release.
Earnings Report Review
Myriad Genetics Inc.’s third quarter fiscal 2010 earnings of 33 cents per share fell short of the Zacks Consensus Estimate of 38 cents. The company had earned 38 cents per share (from continued operations) in the year-ago period.
Molecular diagnostic revenues for the reported quarter climbed 5% year over year to $90.8 million. The improvement was primarily attributable to Myriad’s increased sales and marketing efforts. However, a weak economy continued to affect sales adversely in the third quarter of fiscal 2010.
(Read our full coverage on this earnings report here: Myriad Genetics Falls Short)
Agreement of Analysts
Twelve analysts have reduced their earnings estimates for fiscal 2010 with no upward revisions over the last 30 days. Fiscal 2011 estimates have also seen an overwhelming downward bias over the last 30 days. Fourteen analysts have lowered their earnings estimates over the past month while none have moved in the opposite direction.
There are a number of reasons for the negative sentiment regarding Myriad. We remain concerned about the highly competitive market in which the company operates. Tests that are developed are characterized by rapid technological change. If the company fails to compete effectively with scientific and commercial competitors, successful commercialization of its products will not be feasible.
Even though Myriad Genetics has developed and marketed several molecular diagnostic products to date, the demand for the existing molecular diagnostic products may be impacted adversely due to the current economic downturn.
Furthermore, the company’s pipeline of new molecular diagnostic candidates is in various stages of development, may take several years to develop and must undergo extensive clinical validation. Any pipeline development has attendant risks.
Additionally, Myriad’s flagship product, BRACAnalysis (Be Ready Against Cancer) for assessing a woman’s risk of contracting hereditary breast and ovarian cancers and most of its other molecular diagnostic products, are utilized only once for every patient. This requires the company to sell its services through physicians to new patients or develop new molecular diagnostic products in order to continue generating revenues.
Magnitude of Estimate Revisions
The above table indicates that earnings estimates have plummeted by 18 cents and 27 cents over the last 30 days for fiscal 2010 and fiscal 2011 respectively. The magnitude of estimate revisions not only highlights the weakness of the stock but further justifies our decision to downgrade the stock to Underperform from Neutral following the earnings release.
Our Recommendation
Currently, we have an Underperform rating on Myriad Genetics. Although the molecular diagnostics business is performing well, we remain concerned about the overall weakness in the economy. It has affected sales adversely in the recent quarters. The competition confronting the company’s products in the biotechnology and genetics testing field is also a concern.
Our current rating on Myriad Genetics indicates that the stock is expected to Underperform the broader US equity market over the next six to twelve months. We advise investors to exit this stock over this time period.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “MYGN”
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