I generally avoid the biotech/health tech space, but the Myriad Genetics (NASDAQ:MYGN) story is simple enough to understand and evaluate. After riding high for years, the company came under pressure within its core competency: hereditary cancer diagnostics. Diversification and M&A efforts have proven to not be enough to stem the tide of margin erosion from fresh competition, and within a beaten-down sector that values growth highly, it shouldn't be a surprise that the shares have seen their value cut in half over the past two years. 2017 has been a year of recovery for shares, particularly over the last two months. As a fan of the company's business model and story, I'm glad to see it finally building a base. As an investor, however, the question remains simple: Does Myriad Genetics have long-term value potential, and is now the time to buy?

Business Overview, Long-Term Outlook

Founded in 1991 and based out of Salt Lake City, Myriad Genetics focuses on the development and marketing of predictive prognostic medicine tests. Diagnostics the company provides allow the assessment of an individual's risk for developing a disease, identifying the likelihood a patient will respond to certain drug therapies, the risk of recurrence/rate of progression, or providing guidelines for dosing. As a staunch critic of how the United States healthcare system is run, any company that helps to drive down overall costs via the elimination of misdiagnosis and improving early detection, all while improving patient welfare, is going to tend to be in my good graces.

Tests include, but are not limited to, BRACAnalysis and BART (hereditary breast and ovarian cancers), COLARIS (colorectal/uterine cancers), and myPath Melanoma (RNA expression test for melanoma). Overall, Myriad targets six medical specialties: oncology, dermatology, autoimmune, urology, neuroscience, and preventive care. According to the company (as sourced from Clinical Lab Products magazine), diagnostic tests represent just 3% of overall healthcare spending domestically but drive 70% of healthcare decision-making. Figures vary depending on where you look, but overall consensus is that there's hundreds of billions of dollars in wasteful spending in the United States health market, and proper testing and diagnostics could help eliminate a meaningful percentage of that waste.

Strategically, the company wants to hit double-digit revenue growth and improve the international revenue base, all while maintaining a better than 30% operating margin. That's a tall order, particularly given that hereditary cancer revenue, the company's core competency, has been tailing off since fiscal year 2014. While Myriad Genetics does likely have some differentiation due to first-mover advantage (twenty years of experience, nearly 3M patients tested, has identified tens of thousands of variants), the problem keeps coming down to average selling prices ("ASPs"). In the most recent quarter, for instance (Q3 of fiscal 2017), Myriad Genetics grew hereditary cancer testing volumes in a tough quarter seasonally for the first time in five years. Great, right? The problem was hereditary cancer revenue fell 10% y/y, an acceleration from the drop from the 2015/2016 comp drop. The entire decline is therefore attributable to pricing; management also points to revenue recognition delays from an Anthem (NYSE:ANTM) out-of-network decision as well, which is set to continue into the next quarter.

As goes hereditary cancer products, so does consolidated revenue. Revenue was up 3% in fiscal Q3 2017, but only due to the acquisition of GeneSight products ($24 million in revenue contribution), which were added based on the August 2016 acquisition of Assurex Health ($225 million in cash, potential for $185 million in additional payments based on performance milestones). Growth has been great there, with revenues up 44% y/y (7% sequentially). A product from another key acquisition, Vectra DA (acquired from Crescendo Bioscience for $245 million in cash), unfortunately posted y/y declines (9%). However, this quarter marked a return to sequential growth after the company clarified some issues relating to a study with negative results. That ties into the ongoing situation with Medicare non-coverage, but Myriad Genetics is optimistic that there will be a favorable resolution. Supporting data is on the way, with the company recently announcing the completion of enrollment in a 1,200-person clinical study which will provide data within calendar year 2017. Prolaris posted revenue declines, mostly due to a Medicare retrospective payments unfavorable comp last year. Volumes were up, breaching the 20,000 annual run rate for the first time. The comment period on the Medicare Favorable Intermediate LCD concluded recently, and if Medicare confirms, it will expand reimbursement coverage by 50%.

While there are negatives here (namely, volume growth at the expense of ASPs), Myriad spins these business lines as having serious potential, primarily due to higher ASP outlook. The majority of these products have issues with insurance non-coverage, which drives down ASPs to cash-paying customers that want access, as well as denting volume. Driving greater commercial insurance adoption is a key goal, and one that is central to the underlying investment thesis. If Myriad Genetics cannot prove out that its products can save insurance companies significantly - by the company's estimates hundreds of millions per year for large payers - then it is going to struggle.

There are nearly a dozen clinical studies that will conclude over the next two years that could boost visibility of the company's products, particularly in metastatic breast, ovarian, and pancreatic cancers, which could lead to adoption. With that said, I am not convinced that ASPs will see the rise management is expecting. A lot of existing large payer contracts within hereditary have seen pricing concessions in order to lock in longer deals, and I suspect there might be more pressure on pricing than expected. However, non-hereditary products do make up 68% of volume but only 28% of revenue. There is plenty of opportunity for expansion there, at least compared to hereditary as a baseline.

This is a likely reason why there is a strong focus on international sales. The European Union and Canada tend to be much quicker at adopting new technologies in the medical space, although pricing is often much lower than the United States. Expect Prolaris, Vectra DA, EndoPredict, and the various myPlan hereditary platforms to be pushed overseas. The international mix has picked up quite a bit since fiscal 2014 (<1% revenue) to 5% today, and I think it is a more than reasonable expectation that Myriad Genetics reaches its goal of 10% of revenue being sourced internationally by the end of fiscal 2020.

Roadmap To 2020, Valuation

For shareholders, growth of non-hereditary, both in volume and price, is paramount to a long thesis. Myriad Genetics has a goal of $1,200 million in revenue by fiscal 2020, but it also sees $300 million in run-off of revenue from hereditary, or basically a 50% haircut from current levels. To fill the gap, management is looking for 15% annual growth from the company's so-called stage three products (GeneSight, Vectra DA, Prolaris, EndoPredict), with considerably less emphasis on products not as far along in development. But importantly, the company bases this on 75% reimbursement, which requires significant increases in average selling prices:

*Myriad Genetics, 2017 Investor Presentation

Investors clearly believe in a turnaround; Myriad Genetics is now more expensive on trailing measures (EV/EBITDA, P/E) than it has been for most of its recent history. However, there is a lot of upside if the company can execute; fiscal 2020 would see EBITDA in the $430 million range based on management targets, enough to warrant the shares more than doubling in value (EV to $3,870 million on a 9x multiple, 132%). This is a story of execution and a little bit of faith in whether CEO Mark Capone and team are both setting realistic goals and have the clout to achieve them. Unfortunately, my expertise ends there, and I have no way of assigning a fair probability to achieving those goals. I've got to take a pass on the company as a result, but I can see why many investors are interested, particularly after the recent fall.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Myriad Genetics: Worth A Bet On Diagnostics Kit Pricing Expansion? - Seeking Alpha