This Company's Loss Is Your Gain

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist Innovation Innovation

Shares of Myriad Genetics (Nasdaq: MYGN) slipped last week after the U.S. Supreme Court unanimously decided that human genes can't be patented. The ruling dealt a blow to the company's huge share of the genetic testing market.

Don't think this is some legal and science fiction mumbo jumbo that won't affect you. It likely will impact your life. And if not yours, definitely your children's.

Genetic science has come a long way. Cancer drugs are designed to target specific genes in mutated cancer cells and spare normal cells. In some illnesses, we now understand which mutations cause disease.

And the knowledge is growing every day.

Myriad Genetics has been at the center of the genomic knowledge revolution. The company offers a test for the BRCA1 and BRCA2 genes. If either of those genes has specific mutations, there is an 80% chance of developing breast cancer and a 55% chance of ovarian cancer. Myriad's test - BRACAnalysis - costs around $3,000 and generated over $400 million in revenue last year.

The actress Angelina Jolie recently went public with her decision to have a double mastectomy after tests showed she had the mutation that suggests a strong probability of developing cancer.

Testing the Market

It's easy to understand why cancer advocates don't think a gene should be patentable. Wider and cheaper access to the technology will save lives.

After inventing the polio vaccine, Dr. Jonas Salk did not patent the drug as he believed it belonged to the world. In the same light, the Supreme Court ruled that man-made genes could be patented, but a gene that occurs in nature cannot receive patent protection.

Not surprisingly, Myriad shares fell after the decision. But Myriad was likely to run into problems soon anyway.

The patent that was challenged was set to expire in 2015, so even if it had been upheld, the company had just another 24 months or so of exclusivity.

Just like with a blockbuster drug that goes generic, there will likely be lots of players clamoring for a piece of this lucrative business.

Some analysts predict that competitors will offer the tests for less than $1,000. Quest Diagnostics (NYSE: DGX) and Bio-Reference Labs (Nasdaq: BRLI) have already announced plans to get into the BRCA business later this year.

The University of Washington and privately held Ambry Genetics said they will immediately begin offering the tests.

I also wouldn't be surprised to see Qiagen (Nasdaq: QGEN), which offers a variety of genetic diagnostics, enter the space as well.

The Price We Pay

A Myriad spokesman told Bloomberg that the company doesn't expect the court's decision to affect its business, which is about as truthful as President Clinton saying he did not have relations with that woman.

With competitors poised to undercut Myriad in the immediate future, it will be very difficult for the company to maintain its dominant market share. It's the natural progression in the healthcare industry when a drug or device loses its patent exclusivity. A slew of competitors offer lower-priced products and crush the margins of the company that offered the original version.

Additionally, I wouldn't be surprised if individual genetic tests like BRACAnalysis are considered old and outdated in the not-too-distant future as we get closer to sequencing the entire genome for the masses.

It was only a few years ago that it cost $1 million to sequence the human genome. Today it takes 24 hours and can cost as little as $1,000. I expect that within a decade, costs will come down so far that your genome will be sequenced as routinely as you get your cholesterol checked.

Myriad's loss is a gain for women's health as more women will be able to afford to get the test and make choices that will lead to better health.

Investors concerned about their financial health should avoid Myriad Genetics.

Good investing,

Marc

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For the past three years, Marc has been following a company set to completely revolutionize the $956 billion/year pharmaceutical industry. He's talked directly with its executives and watched as it has perfected its "Cures on Demand" technology.

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