MYRIAD GENETICS INC quarterly report, Q3 FY2022

Myriad Genetics, Inc. — Form 10-Q Summary

Business context and reporting period

Myriad Genetics is a genetic testing and precision medicine company operating as a single reporting segment. Its principal product areas are Hereditary Cancer, Tumor Profiling, Prenatal, and Pharmacogenomics. This Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.

The company continues a strategic transformation focused on Oncology, Women’s Health, and Mental Health, including investment in commercial capabilities, technology-enabled tools, sequencing, direct-to-consumer channels, and new products.

Financial performance and key metrics

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$156.4 million	$167.3 million	$500.6 million	$529.8 million
Operating loss	$(45.0) million	$(79.9) million	$(88.4) million	$(147.4) million
Net income (loss)	$(35.1) million	$24.6 million	$(69.7) million	$(19.6) million
Diluted EPS	$(0.43)	$0.30	$(0.87)	$(0.25)
Cash flow from operations	Not separately provided	Not separately provided	$(98.6) million	$28.1 million

Q3 revenue declined 6.5% year over year. Molecular diagnostic testing revenue was $156.4 million, compared with $167.3 million. Nine-month molecular diagnostic revenue declined modestly to $500.6 million from $505.6 million; the prior period also included $24.2 million of pharmaceutical and clinical services revenue before the sale of Myriad RBM.

Q3 product trends: Hereditary Cancer revenue decreased $8.9 million, Tumor Profiling decreased $2.1 million, Prenatal decreased $1.5 million, and Autoimmune decreased $7.3 million following its divestiture. Pharmacogenomics increased $8.9 million, primarily from a 34% volume increase.
Nine-month product trends: Hereditary Cancer declined $20.9 million, while Pharmacogenomics increased $31.2 million, Prenatal increased $10.6 million, and Tumor Profiling increased $2.5 million. Autoimmune revenue fell $27.9 million following the sale.
Margins: Q3 molecular diagnostic testing costs were 32.2% of revenue versus 28.6% in the prior-year quarter, implying an approximate diagnostic gross margin of 67.8% versus 71.4%. For the nine months, testing costs were 29.6% of diagnostic revenue versus 27.7%, implying approximate diagnostic gross margins of 70.4% and 72.3%, respectively.
Expenses: Q3 selling, general, and administrative expense decreased $50.1 million to $130.5 million, primarily because the prior period included a $48.0 million legal accrual related to the Crescendo qui tam matter. Nine-month SG&A declined $94.0 million to $368.2 million.
Impairments: Nine-month impairment charges were $10.7 million, including $8.6 million for right-of-use assets and $2.1 million for related leasehold improvements after the company ceased using a Salt Lake City facility.
Taxes: The company recorded income tax benefits of $9.1 million in Q3 and $18.8 million for the nine months, with effective tax rates of 20.6% and 21.2%, respectively.

Liquidity, cash flow, debt, and capital resources

Cash, cash equivalents, and marketable investment securities totaled $259.2 million at September 30, 2022, down from $398.8 million at December 31, 2021.
Cash and cash equivalents declined to $110.7 million from $258.4 million. The decline primarily reflected $98.6 million of operating cash use, $30.7 million of capital expenditures, and tax-withholding payments related to equity awards.
Investing cash flow was $(41.9) million, including $30.7 million of capital expenditures and net purchases of marketable securities. The prior-year period benefited from $379.1 million of divestiture proceeds.
The company had no outstanding borrowings under its revolving credit facility at September 30, 2022. The facility matures July 31, 2023, has a $200.0 million commitment at the reporting date, and is scheduled to decrease to $150.0 million by December 31, 2022.
Because unrestricted cash, cash equivalents, and marketable securities exceeded $150.0 million, the company generally could not draw under the facility except for permitted acquisitions. The facility also includes a $150.0 million minimum liquidity covenant.
The company states that existing capital resources should meet projected operating requirements for the foreseeable future, but cautions that additional financing could become necessary and may be difficult or costly in a rising-rate environment.

Material changes versus the prior comparable period

Revenue declined despite strong Pharmacogenomics growth, primarily because of lower Hereditary Cancer revenue, the Autoimmune divestiture, and the absence of prior-period pharmaceutical and clinical services revenue.
Operating losses improved substantially because of lower legal, transformation, compensation, and amortization costs, but the company remained loss-making.
Net income reversed from a $24.6 million profit in Q3 2021 to a $35.1 million loss in Q3 2022. The prior-year quarter included a $121.0 million gain on the sale of Myriad RBM.
Nine-month operating cash flow declined from $28.1 million provided to $98.6 million used, largely due to prior-period tax refunds, legal settlement payments, and changes in accrued liabilities.
Accrued liabilities declined to $85.3 million from $156.5 million, including the elimination of the prior-year $62.0 million legal settlement accrual.

Guidance, outlook, risks, contingencies, and unusual items

The filing does not provide clear quantitative revenue or earnings guidance. Management expects to pursue long-term growth and profitability through its transformation plan, expansion of commercial capabilities, product development, and targeted acquisitions.

On November 1, 2022, after the reporting date, Myriad acquired Gateway Genomics for $67.5 million upfront, subject to adjustments, plus up to $32.5 million of contingent consideration.
The company has approximately $136.6 million of future rent payments under two major leases expected to commence in the third quarter of 2023.
Management identifies reimbursement changes, competition, regulatory requirements, intellectual property disputes, COVID-19 effects, inflation, supply-chain disruption, employee retention, cybersecurity, and financing covenant compliance as significant risks.
Legal matters include securities class and derivative actions, patent litigation involving Ravgen, a purported class action concerning the Prequel prenatal test, and third-party payor recoupment requests. No legal loss contingency was accrued because an unfavorable outcome was not considered probable and reasonably estimable, but management states that an adverse resolution could be material.
The company’s disclosure controls were not effective as of September 30, 2022 because a previously identified material weakness in information technology general controls remained unremediated. Management reported that the separate income-tax control weakness identified in 2021 was remediated by March 31, 2022.
Approximately 10% of revenue is denominated in currencies other than the U.S. dollar. Foreign exchange movements reduced revenue by approximately $3.3 million in Q3 and $7.1 million for the nine months. The company does not currently hedge this exposure.

Important facts for investors to verify

Whether Pharmacogenomics growth can offset declines in Hereditary Cancer and the effects of divestitures.
The sustainability of diagnostic gross margins after the increase in testing costs and compensation expenses.
The pace of operating cash burn and whether the $259.2 million liquidity balance remains sufficient after the Gateway acquisition and planned facility commitments.
Compliance with the amended revolving-credit facility’s liquidity requirements and the scheduled reduction in borrowing capacity.
Progress in remediating the material weakness in IT general controls.
Potential financial exposure from pending litigation, payor recoupment requests, patent claims, and the Prequel-related lawsuit.
The integration costs, contingent consideration, and revenue contribution associated with Gateway Genomics.