The Case For Shorting Myriad Genetics

Many articles have been written about Myriad Genetics (MYGN) – some bullish, some bearish.  This is a bearish article, looking at the company from a different angle.  In a nutshell, Myriad’s claim to fame and fortunes rests on tests for genetic mutations.  Most of Myriad’s revenues (85%) come from its BRCA test for breast cancer, each test costing about $4,000.  The results of this test convinced Angelina Jolie to get a double mastectomy in May.  And which popped Myriad shares to a 52 week high.

The Supreme Court Decision on June 13 put paid to the Jolie bump and the stock sank on massive volume.  In essence, the court ruled that Myriad could not patent the human genome, though it could patent plasmids and cDNA, allowing in competitors for those tests.  In response Ambry Genetics announced plans to introduce a test soon for $2,200 and Quest Diagnostics would by the end of the year.  Gene by Gene, based in Houston, plans to offer the test for $995.  Of course, Myriad sued Ambry and Gene by Gene, and the stock began to climb again, though not reaching its Jolie peak.  On Aug 13, the company reported earnings that beat expectations handily, yet the stock fell.   So the question is, is this a buying opportunity, or time to exit?  A few aspects that have not been covered by other authors are outlined below that an investor may want to cogitate over.

1.       It’s not the news that matters, it’s the reaction to the news.   This is one of the earliest lessons I learnt while investing.  I used to wonder why a stock fell on good news and rose on bad.  It was the realization that the news was baked into the stock and Mr. Market, being forward looking, had discounted that.  So the negative reaction of the street to the earnings beat of Aug 13 is worth noting.  Not only the earnings beat, but also the positive guidance.  It’s the market’s way of saying we don’t believe you, your best days are behind you.

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