Author: Riddhi Ruparelia
Covestor model: Long Term Growth
With our portfolio up 32.4% in 2012 (as of August 10 per Covestor), it seems that investors are slowly buying into genuine growth companies like the ones held in our portfolio.
One such growth industry is genetics-based diagnostics tests. With the cost of decoding genes going down, a variety of applications leveraging such information have grown in last few decades.
One of the more commercially successful applications is a genetics-based test specially for prediction, diagnosis and treatment of cancer. Of the many companies and laboratories operating in this area, two strong leaders are Myriad Genetics (MYGN) and Genetics Health (GHDX).
MYGN's revenue was $327 million in fiscal year 2009 and the company expects to report $490 million in fiscal year ending June 2012. It has enjoyed an annual growth rate of more than 16% for last three years.
GHDX has done even better in growing revenue. With 2012 revenue expected to be about $237 million (per analyst estimates on Yahoo Finance) GHDX is expected to have delivered more than 19% per annum growth over $150 million revenue since 2008.
The good part is that these companies have set up such franchises with enviable gross margins of greater than 80% in such a competitive field. Just to clarify, both companies' tests have different usage and they don't directly compete.
Both companies' revenue largely comes from a breast cancer test franchise and mostly from the US market only. That means there is growth potential in the international market.
Both MYGN and GHDX are working hard to bring international revenue to fruition and have just started seeing early success in this area. Similarly, both have recently launched a test related to colon cancer and already reported early revenue from colon cancer tests.
MYGN is a bit ahead and reported $10 million-plus revenue last quarter from the colon cancer test. Both companies have additional products in the pipeline which, if successful, will sustain revenue growth for many, many years to come.
Finally, since both companies continue to invest heavily into R&D and sales activities to build franchises, we believe price to sales (P/S) is better metric for valuation. Currently both GHDX and MYGN trade at an attractive valuation P/S of 5x.
Since MYGN is further ahead in developing revenue, it has already found a good balance of investing as well as returning value to shareholders. It certainly makes MYGN more attractive for more conservative investors.
We started buying MYGN since March of 2012 and it's essentially flat for us so far.
For GHDX, we have been buying since March of 2010. With a few more tranches bought over last two years, we hold a paper gain of 84% on our GHDX holding as of August 10, 2012.
In either case, we believe we are looking forward to a multi-year growth in revenue, earnings and stock price of these companies.
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Disclosure: Long MYGN, GHDX